Bounce Back loans and community equity: the West Lancashire model
There’s a K-shaped economic threat coming down the road, and it looks like this.
The National Audit Office (NAO)reports that around £43bn were given out in ‘bounce back’ loans to businesses in the earlier stage of the pandemic, with small firms able to access up to £50,000. Conditions for the loan were very loose, with little or no affordability checks made by the banks who acted as conduit for the government money.
The NAO estimates that somewhere between £13 and £25bn of the loans will be defaulted on. While the relatively small number of fradulent or near-fraudulent loan applications may dominate headlines in the future, in the vast majority of cases the loans will have been taken in goood faith, but often out of desperation, by small business owners desperate to stay afloat but ineligible for the furlough and grant support offered to other parts of the economy.
This will be a slow burner, especially as plans for a debt collection agency appear to have been abandoned, but it doesn’t mean the effects won’t be harmful. While at the aggregate level the government picking up a £20 billion or so tab over the next ten years isn’t a huge issue, the impact on some 600,000 businesses in default could be.
As I’ve said, most of these businesses are people just trying to get by, and who’ve lived a debt-free life so far (mortgage withstanding) so the psychological effects of long term debt on people can be quite significant, even at the reasonably manageable 2.5% interest (so a £50,000 loan in ten years will need repayment of £62,000 to clear it). Alongside this, there’s the potential for that debt to hamper future investment, as it becomes a drag on algorithmic ‘credit worthiness’.
There is, though, a win-win institutional solution — a solution that I’m actively involved in designing and testing.
At West Lancashire Resilience Society, we’re developing a ‘community shares’ offer, due to go live this summer, following registration with the Financial Conduct Authority. The money raised from the offer will be used to support small business that have underlying financial health, but are struggling because of the pandemic.
There will be a focus on retail and hospitality, as this adds value to local towns’ high street offer, but with scope to support other sectors. Retail, accommodation and ‘food service activities’ make up around 30% of all bounce back loan takes (table 13) but this far outstrips their normal share of overall borrowing, suggestive of the desperation many faced, and lack of alternative).
In return for the investment, the Society will take equity in the businesses, with a ‘buy back’ clause written into the contract for those owners who find ways and want to take 100% ownership back. We suspect that once the advantages of part-community ownership, in terms of local loyalty and other support services we can offer, that many will decide to stay with us.
Of course not all investments will be based on freeing small business owners of debt so that they can get on with running the business, but this may turn out to be one way we start to get a stakeholder toehold in the shareholder economy, and lead the way for others. Good news travels fast.
The funder-cum-think tank Social Investment Business has also seen the Meadean light with its new Debt-to-Equity campaign, in theory, and may bring institution-building resources in time, but we’re already doing the hard bootstrapping  yards of the confidence (self)-building, the detailed financial planning, and of tackling the legal obstacles set in the way of this kind of innovation.
In so doing, we’ll be building on the Preston model, and moving from Community Wealth Building agenda still largely focused on procurement practices, to develop a Community Wealth and Agency Building programme.
 We’ve had £2,000 from Stephen Lloyds awards for getting to their national innovation final, but nothing else external. In a way, that’s the point. We have to do it from our own resources, if it’s going to be properly replicable. Not that we’d turd down another 2,000 mind, if anyone’s feeling generous.
Photo: Old Skelmersdale High Street
Photo credit: Steve Hanlon