Saving Private Business – The UK Bounce Back Loan

Authors Marc Cowling, Paul Nightingale, Nick Wilson, and Marek Kacer find “everything researched and written about COVID-19 in whatever context – medical, psychology, economics” a compelling read these days. Their own paper, “Predicting future default on the Covid-19 bounce back loan scheme: The £46.5 billion question,” published in the International Small Business Journal, takes a look at how the pandemic affected a British loan guarantee program. Their reflections appear below the paper’s abstract:

The UK has had a commitment to loan guarantee schemes since 1981 when it introduced the Small Firms Loan Guarantee (SFLG) scheme to address access to debt finance issues for smaller firms. Over the last 40 years, its support has been unwavering, and in the Covid-19 crisis, it once again turned to loan guarantees as a means of supporting smaller firms through the crisis-induced slump in trading activities. Of its three core Covid-19 guarantee schemes, the Bounce Back Loan (BBL) scheme was the most numerous with 1,531,095 loans issued amounting to a total of £46.5bn in lending. The BBL scheme provided a 100% capital guarantee on loans between £2,000 and £50,000, and firms were allowed to borrow up to 25% of their trading income, with a fixed interest rate of 2.5% of which the first years interest was paid by the government to the lending bank. Our findings suggest that the government losses may range between £7bn and £12bn depending on the underlying assumptions; however, we estimate Covid-19 guarantee schemes may have protected 118,639 businesses and 1,117,849 jobs. Looking to the future, we suggest that a new loan guarantee is justified that more resembles the former SFLG than the restrictive Enterprise Finance Guarantee (EFG) as more than one million small businesses will be heavily indebted and unable to borrow to invest in future growth opportunities. This would support the ‘levelling-up’ agenda and help prevent a post-Covid-19 low investment–low growth scenario.

What motivated you to pursue this research?
The COVID-19 crisis has had a severe effect on small businesses and the Bounce Back Loan scheme in the UK offered them a lifeline through providing them the cash to manage their way through the lockdown period. Understanding what the full consequences of this unprecedented level of support inspired this research.

What has been the most challenging aspect of conducting your research? Were there any surprising findings?
The most challenging aspect of our research was that the scale of the crisis and the intervention were beyond anything experienced in living memory. And the research was conducted as the crisis was still unfolding and more small businesses were accessing the scheme. This meant that what we thought were stable findings might not hold if the UK had another lockdown or a different COVID-19 variant took hold. 

In what ways is your research innovative, and how do you think it will impact the field?
Our research is innovative in several ways. First, it was live research in the sense that the data was updated every week and we had to deal with that. It was conducted at speed due to the need for academics and policymakers to understand what is happening now and what the long-term consequences of choosing particular paths might be. In terms of the academic field in general, I think it has shown that some academics are capable of climbing down from our ivory towers and offering evidence-based insights when it really matters. The International Small Business Journal was the first mover in this field and should be congratulated for this and the value, debates, and insights it offered.  

What did not make it into your published manuscript that you would like to share with us?
Obviously, it was lighter than normal on formal theory development. But we thought this was a better avenue to take given that businesses, jobs and the livelihoods of families might be indirectly impacted through our work. We are not medics and cannot directly save lives – but we are economists and it is incumbent upon us to use our expertise and knowledge to improve the quality of economic outcomes through informing and influencing policy. 

What advice would you give to new scholars and incoming researchers in this particular field of study?
The issue, the relevance, and the timing are important. Don’t believe journal editors and reviewers who say “we know all that already.” They are wrong. Nothing is absolute and everything we do know might not stand up to scrutiny in a new context. 

What is the most important/ influential piece of scholarship you’ve read in the last year?
Cheap answer, but everything researched and written about COVID-19 in whatever context – medical, psychology, economics, etc. It’s a huge, frightening, and complicated jigsaw to understand COVID-19 and hopefully defeat. Some academics carried on as usual whilst many took up this global challenge and have made a real difference.