In a press conference on Tuesday, Prime Minister Boris Johnson and Chancellor of The Exchequer Rishi Sunak revealed that the UK government would launch a GBP 330bn lifeline of loans for businesses hit by the coronavirus. The GBP 330bn government business loan is part and parcel of a wider emergency fiscal package that will provide a further GBP 20bn in tax relief, a business rate holiday and grants to support at-risk businesses.
The business loan package will be made available on top of the GBP 7bn announced by Sunak for firms in last week’s budget. He also declared that should the GBP 330bn package not be enough, he will go further and do “whatever it takes” to lessen the detrimental effects of the coronavirus.
Sunak also hinted financial aid to airlines and airports may be made available after Gatwick and Heathrow airports both warned the government that they are under threat of closing down amid global travel restrictions.
What is the GBP 330bn business loan
The massive GBP 330bn business loan by the government is equivalent to 15% of British Gross Domestic Product (GDP) and will help ease the financial pressures UK businesses are under in such uncertain times. Sunak has stressed that the loan is “low-cost and easily accessible” to discourage businesses from laying off employees to reduce overheads.
The loan scheme will help to alleviate cashflow crises and will be delivered in two ways. For larger firms, they will be able to access the loan through the Bank of England (BoE), who will buy up their outstanding bonds. In the case of larger businesses, only those who are able to prove financial stability before the coronavirus disruption will be eligible to apply for the lending scheme.
For medium-sized and smaller businesses, the Chancellor vowed to expand the coronavirus business interruption loan scheme outlined in last weeks’ budget, so that small businesses can borrow up to GBP 5 million, interest free for the first 6 months.
Both government business loans will become available from the start of next week and, whilst neither is a complete bailout, the loans will stem the risks of businesses failing and triggering an economic crisis.
So far, the reception from businesses and trade bodies regarding the loan scheme has been positive.
What does the new government loan mean for UK businesses?
For businesses struggling to cope with the financial pressures inflicted by the Covid-19 pandemic, the business interruption loan scheme will help firms to continue trading and paying wages, suppliers, rent costs and buying stock, all on attractive terms.
A year long business rate holiday is also being extended to businesses within the retail, hospitality and leisure sectors to help them through this difficult trading period as customers have been asked not to attend pubs and clubs, and as events across the country have been postponed or cancelled.
What about businesses dealing in international trade?
International trade has been heavily affected by the coronavirus outbreak but the UK government’s business loans will help prevent firms from failing by allowing them to meet their financial obligations and providing monetary liquidity for companies suffering from delays in international supply chains.
Whilst the outcome for Q2 and Q3 this year is very much uncertain, it is highly likely that more aggressive measures will need to be taken by Johnson and his war cabinet, also known as C-19, beyond the business loan package; which is already a huge intervention and step in the right direction for UK’s economic survival.
The British pound, which has been falling against the US dollar and the euro, saw some relief after the unveiling of the new business loan package. If the British economy is able to benefit from the government loans, which will be initiated next week, the foreign exchange markets will find the pound more attractive, boosting Sterling’s value.
What is clear, is that UK businesses that are trading internationally and have currency needs, are exposed to foreign exchange risk.
Managing currency risk is not easy at the best of times but in the current climate, and with currencies as volatile as they presently are, it is essential that businesses seek expert help to support their decision making.
At Halo Financial, foreign exchange and currency risk management is at the core of what we do and a discussion with one of our team of experts may often uncover many operational and financial benefits.
What is the government’s next step?
The UK hasn’t reached the peak of the virus yet and Sunak hinted that he has the capacity to provide more financial support if the economy needs it.
In the press conference, he said that now is the “time to be bold” and that further measures would be unveiled covering rent support, a package for airlines and new forms of employment support, which may include cuts to national insurance contributions and increased universal credit.
VAT cuts may also need to be made and the government may underwrite portions of company payroll costs, although that would be an extremely costly approach.