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Government backed loans pile on the debt for hospitality operators

Published:  16 February, 2021

Mounting debt for operators who’ve had no choice but to take on huge government-backed loans to stay afloat is creating an untenable pressure cooker situation for the trade, hospitality owners have said. 

Government backed loans have offered vital support for the hospitality industry through the Covid pandemic, enabling many to survive three lockdowns in 12 months. But unless the trade can get back to trading without punitive restrictions, the debt that many have been forced to take on could lead to a house of cards situation for the industry. 

This unsustainable position has become clear while speaking to prominent members of the hospitality industry, such as Xavier Rousset MS, owner of Blandford Comptoir, Cabotte and Black Book.

Rousset was able to take a £50k government backed loan for each of his five London restaurants, without which he’d have had to close permanently. Now, however, he has £250k to repay. 

“We didn’t ask to borrow more but had no choice to survive, nobody expected this,” he told Harpers. “It will only be manageable if we can trade properly in the next few months and years."

Considering the bigger picture, he says having some debt is “better than closing down”, but others have also highlighted the huge strain such debt will place on businesses, impacting full recovery. 

“I find it outrageous that we have been forced to take on huge amounts of debt in order to fund ourselves during a forced government closure,” Melody Adams, co-founder of Marylebone restaurants Donostia and Lurra, said.

“Assistance to hospitality should have in the very least included compensation for all rent outgoings, the number one cash flow issue facing operators today.”

According to NatWest, there are an estimated 186,680 hospitality businesses in the UK. If only a quarter of these businesses took out £50k government backed loans, then the total debt is £2.3 billion. 

It’s a worrying situation for the trade – and not just in the UK. Mounting debt means payments are pushed back along the supply chain, leading to invoices left unpaid and growing economic uncertainty among both local suppliers and producers abroad. 

“We are very much exposed to the debts of our customers,” Sam Thackeray, MD of Enotria & Coe, confirmed.

“On the one hand, we are suffering from the impact of the lockdowns in much the same way, so we have a very empathetic approach. We understand that our customers are not really in a position to repay debt given they have no means of revenue creation. On the other, extending credit forever is untenable. So we work closely with our customers to gain insight into their business, their proposed reopening plans and work with them on stock and sales plans.”

Is this financial burden manageable? According to Luke Davis, CEO of IW Capital, the rising debt has resulted from loans that will only provide a short-term solution. Inevitably, this will result in an increase in overheads, and could lead to the “demise of a lot of businesses”.

“The debt they have accumulated is not just from government backed loans, as many would have also taken on traditional loans or asset finance and do everything they can to keep their business afloat,” he said. 

A number of solutions have been put forward by IW Capital and others. 

Mark Hart of accountants Blick Rothenberg is calling for “another holiday for another year before repaying the debt”. 

This is “the minimum the government should do, combined with extending the rates holiday, to give businesses a chance to re-establish themselves”, he said. 

Davis would also like to see the extension to the scope of the Enterprise Investment Scheme (EIS) to include hospitality businesses at the March Budget. 

“Hospitality used to qualify for investment under the Enterprise Investment Scheme, but unfortunately this was scrapped,” he said. “If the EIS is extended to hospitality in March, we would see a huge increase of investment and private equity into the sector, meaning businesses wouldn’t have to take on more debt to survive, giving them a much larger chance of success in the future.”

“This could help to encourage a huge amount of investment into the businesses that need it,” he concluded.