Debt-for-equity: a social economy response to the Covid debt burden on SMEs

Government-backed Covid lending schemes have been a lifeline for small businesses – reaching a quarter of all UK SMEs – but in the long term, high levels of debt cause problems. One solution: developing a more social economy by transitioning at-risk, viable private businesses into employee or community ownership at scale. Social Investment Business CEO Nick Temple on a new campaign that hopes to create a fairer, more inclusive and resilient economy.

It feels like we are entering the end of lockdown, but perhaps only the beginning of understanding the longer-term effects of the pandemic. Work patterns have changed, consumer spending has altered, and different sectors of the economy have been dealt substantial blows. We also know that the health and economic impacts have not been felt equally at all.

At Social Investment Business, we spent much of the last 12 months focused on a response to the emergency, particularly in the social sector: in total, with our partners, we helped distribute almost £50m of grants and loans to thousands of charities, social enterprises and community businesses. But now it is time to shift our collective focus to longer-term recovery.

Part of that is to have a debate about the effects of some of those emergency interventions. One of those is that the government-backed Covid lending schemes have now loaned money to over 1.6m companies to the tune of £75bn. That is roughly a quarter of all SMEs in the country.

Autism Plus

Above: a staff member checking a gym user's blood pressure in a fitness session at Autism Plus, a charity that got a loan through the Resilience and Recovery Loan Fund (credit: Autism Plus)

There is little doubt that these schemes have been incredibly helpful and effective: in combination with furlough, they have afforded businesses the ability to survive and sustain themselves. Indeed, we have run our own guarantee-backed fund, the Resilience & Recovery Loan Fund, which has provided emergency lending of almost £25m to over 70 charities and social enterprises. Many are still delivering their services because of it. And we are developing a successor fund, with an even greater focus on patience, flexibility and the people and places most in need.



But high levels of debt are a problem in the long-term, not just for individual businesses but for the economy as a whole. High levels of debt could prolong an economic downturn precipitated by the pandemic, and particularly afflict SMEs which are vital for healthy local economies and job creation. It is also likely to be a larger problem for those in less wealthy areas, which could further widen the inequalities we see around us.

A fair recovery requires patient and flexible finance. It also requires us to think differently and radically about ownership

A fair recovery seeking to address those inequalities requires patient and flexible finance. It also requires us to think differently and radically about ownership.

This is why we have launched a debt-for-equity campaign – seeking to use the opportunity the pandemic has created to develop a more social economy by transitioning at-risk, viable private businesses into employee or community ownership at scale.

In practice, a debt-for-equity swap fund would seek to:

  1. Reduce the debt burden of SMEs that have been impacted by the pandemic
  2. Protect local businesses and jobs
  3. Facilitate the transition of private businesses toward social ownership

So we are convening communities, practitioners, policymakers and investors in the coming weeks to debate and discuss the feasibility and the design of such an intervention.

Most charities and social enterprises can’t take equity investment (as they aren’t shareholder-owned); but, used in this way, equity could be part of the answer to how we tackle the debt problem, avoid the negative impacts of local business closures, and build community strength.

Finding those answers will be crucial to help make real the rhetoric about ‘building back better’ and ‘levelling up’ – and to genuinely create a fairer, more inclusive and resilient economy that works for all.

Social Investment Business welcomes feedback on the campaign; sign up to receive updates and stay in touch. 

  • Nick Temple is CEO of Social Investment Business.

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