Banks are reported to be preparing a code of conduct for dealing with businesses that default on Coronavirus loans,

It comes amid estimates that up to eight out of 10 borrowers could fail to repay the taxpayer backed loans in full.

The industry lobby group UK Finance and the state-owned British Business Bank are said to have kicked off talks with commercial lenders in an effort to agree industry-wide debt collection standards before repayments are due.

This drew instant reaction from Lord Leigh, Senior Partner of Cavendish Corporate Finance who said he welcomed the news but that the Government must have a mechanism in place to invest equity in these businesses.  

“It is crucial, however, that this is not done directly by the Government: agencies with the appropriate expertise and skill in making and monitoring relatively small amounts of equity investment on a national basis ought to be in charge,” he said.

“The problem is that such a mechanism needs to be established quickly, before some of these struggling firms start overtrading, and it is unlikely that a new organisation could be created specifically to implement it in the next six months. 

“As think tank Onward recommended in its Bounce Bank report released today, allocating more money to institutions like the British Business Bank, Business Growth Fund and British Patient Capital for convertible loans which can be turned into equity if not repaid would resolve this issue. 

“Equally, firms needing to raise equity without taking on more debt should consider listing on AIM. Not only have AIM-listed companies performed well in recent months with the index recovering quickly from the impact of COVID-19,but – critically –  launching on the market would provide struggling firms with immediate access to equity.”

Loans granted under the coronavirus business interruption loan scheme (CBILS) and bounce-back loan scheme (BBLS) for small and medium-sized businesses have a 12-month repayment-free period, and on the first batch, this will run out in the spring of 2021.

Industry estimates suggest that anywhere between 40 to 80 per cent of businesses could default on their bounce-back loans. A portion of that will be down to fraudulent applications, which are believed to account for about 10-15 per cent of total BBLS.

A City taskforce warned last month that £36bn worth of government-backed loans could turn toxic by next year, as companies struggle to repay growing debts during the Covid-19 crisis.