Chancellor seeks to avoid business cash crunch with extended help

The Chancellor is racing to stave off a winter cash crunch for businesses by boosting loans and tax support being used to prop up more than one million firms.

A new “Pay as you Grow” scheme will almost halve loan repayment costs for small firms, Rishi Sunak revealed, as he also pushed back the deadlines on emergency loan schemes that have handed out nearly £60bn.

Mr Sunak sought to address mounting worries over the debt mountain facing small firms by giving them the opportunity to extend taxpayer-backed bank loans granted under a raft of emergency schemes rolled out when the crisis first struck.

Under “Pay as you Grow”, businesses that accessed the Bounce Back Loans Scheme can extend the length of the loan from six to 10 years, almost halving their monthly repayments costs. They can also suspend repayments for up to six months.

Firms will now be able to tap state-backed loans until the end of November, with European Union state aid rules stopping Mr Sunak from providing longer support. However, the Chancellor said a successor to the business loan schemes was in the works and expected to launched in January, plans first revealed by the Telegraph last month.

Mr Sunak said: “Right now, businesses need every extra pound to protect jobs rather than repaying loans and tax deferrals.

“If we want to protect jobs this winter, the second major challenge is helping businesses with cash flow.”

The loan guarantee schemes have been vital in helping firms to survive the cash crunch caused by the pandemic, but economists feared that business investment could be held back by this huge debt burden. Under the emergency loans scheme, the state boosted lending by covering all or up to 80pc of losses suffered by banks.

The Bank of England sought to ease any pressure on banks from the longer loan terms announced by the Treasury by also extending a scheme which provides cheap funding for lenders that help small and medium-sized firms.

Mike Cherry, chairman of the Federation of Small Businesses, said the “Pay as you Grow” scheme would be greeted with relief by hundreds of thousands of firms, and give them confidence to continue investing and hiring.

Other measures to ease the pressure on businesses included reducing or spreading the tax burden on businesses.

Half a million firms will be allowed to split their deferred VAT bill into 11 payments, meaning they will pay just 9pc rather than 100pc of the cost when the money falls due in March 2021. A total of £27.5bn is owed, with the average deferred VAT bill standing at £60,000.

The Chancellor also extended a hospitality and tourism VAT cut by more than two months until the end of next March. The rate for the hard-hit industries was slashed from 20pc to 5pc in July.

Jonathan Geldart, head of the Institute of Directors, said the loan schemes and tax deferrals will “go some way to defusing a rapidly-approaching tripwire of built-up debt”.

He added: “Extending the loan schemes marks another sensible precaution. With revenues still limited by the virus, directors looking to adapt their organisations will come up against cash crunches in waves."

David Page, head of macro research at AXA Investment Managers, said the measures would ease companies' worries over cash flow, and are likely to be vital in helping companies get through the winter.