A report from a UK think tank has highlighted a cash and confidence crisis affecting small businesses, especially in the hospitality and service sectors. 

Despite an overall rise in company cash holdings, the Resolution Foundation's analysis showed a sharp increase in small firms reporting less than three months of cash reserves. 

With no sign of lockdown restrictions being lifted in the near future, Resolution Foundation recommended continuing government support in the shape of the Coronavirus Job Retention Scheme, business rates relief and delaying already-deferred VAT payments. But it said direct loans should stop, to avoid heavy debts. 

Crucially, companies without sizeable cash reserves are unlikely to invest in new stores or staff, so the effects of the COVID-19 hit to firm's reserves could extend the recession. 

READ MORE

Why vaccines are hard to manufacture

London's thinnest house on the market

Spain to trial four day week

And, of course, some small and medium-sized companies (SMEs) might not be able to survive the downturn at all. 

"Ten percent of businesses whose profits have fallen by at least half, plan … to make redundancies in the next three months," the On firm ground? report revealed. 

Although the extent of the cash crisis has been limited by government intervention, with the overall percentage of small firms reported as "low-cash" steady at 32 percent, "the share of low-cash firms in the hospitality and other services sectors has picked up much more dramatically, hitting 53 and 51 percent respectively," the report said, according to data to September 2020. 

"Around May time last year, we decided to take out $14,000 worth of 'bounce-back' loans. But actually ,at the moment, it's there as a safety blanket really, given the concern or the lack of confidence that people could return to travel … we actually haven't spent that money," explained Alex Stewart, founder of London-based e-commerce company OneNine5.

It's small firms like OneNine5 – that haven't been able to sell to their usual European and worldwide markets but don't have large overheads – which could now be at risk if some government stimulus isn't extended. 

Stewart said he appreciated the safety net but will be paying back the loan to avoid long-term debt. 

"I think, given the uncertainty at the moment, [we] just would rather not accrue any kind of debt," he told CGTN Europe.

Resolution Foundation also noted the risk of debt to SMEs, and warned it could turn them into "Zombies."

"Where they have left firms overindebted, this will discourage investment and hiring, creating a new class of 'Zombie firms' that operate to service their debts, rather than expand and grow," the think tank said. 

Therefore, the report suggests stopping any further direct loans, while continuing other measures, and "transferring liability" for the loans to the issuing banks. The UK government is currently fully liable for these loans, and the Foundation argued it should pay banks to take 20 percent of the liabilities. It proposed "'skin in the game' will help align incentives between the government and the banks."

In essence, if the banks' capital is at risk if companies fail, they will be more likely to offer continued support to avoid collapse.