Some businesses have warned that the government’s £330bn rescue package for British businesses doesn’t go far enough.

The government support package designed to help fight the economic impact of coronavirus—which includes £330bn in loans—is the biggest intervention in private sector business since the Second World War.

But if it doesn’t hit the target it’s of limited use, critics have argued.

Falling through the cracks

There are two programmes on offer. One is a loan guarantee scheme for companies with turnover of up to £45m.

The other is the government promise to buy unlimited amounts of short-term IOUs from companies that are investment grade. This means firms with a high credit rating.

The problem with this setup: there are thousands of businesses that fall between the two stools. Just about every high street chain wouldn’t qualify for either.

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By GlobalData

The UK hospitality and retail sector employs 3.2 million people, more than any other sector in the economy. Most of the industry won’t be eligible.

While firms in this space will get 80% of their staff wages reimbursed, that still means cost going out, with little income coming in and no access to the big government pots.

Banks on the hook

While the loan guarantee scheme will cover 80% of any bank’s losses on any individual loan – it will only guarantee a maximum of 60% of a bank’s total loans under the scheme.

So in fact the government is offering to share 60% of a bank’s total losses rather than 80%.

Most commercial businesses have little intention or ability to pay a quarterly rent bill due this month. If they don’t pay, those losses land on the landlords who have already seen huge reductions in rents, with many having massive debts of their own.

Those debts then become bad loans to the banking system.

New international accounting rules (called IFRS 9) require firms to record their best guess of future total losses on bad loans upfront and account for it immediately, rather than drip feed them over years through their accounts.

Given the gravity of the situation, that could mean a massive hole being ripped in company finances rendering some firms technically insolvent.

“Those are the things that banks will need to take into account when deciding how much or for how long a business can borrow,” said Stephen Jones, chief executive of UK Finance, the banks’ trade body.

On the other hand, Jones said, a lot of small business owners wouldn’t want to take on more debt that will need to be repaid.