Considerable reluctance to take out COVID-19 loans?

The coronavirus crisis has forced many companies to drastically scale back their operations. Overall demand in Switzerland is likely to have fallen by more than 30 per cent during the lockdown. KOF currently expects the country’s gross domestic product to fall by almost 5 per cent for 2020 as a whole. In order to mitigate the consequences of this slump, Switzerland has relied on three support measures: wage subsidies for employees on leave of absence (short-time working), income support for the self-employed and small businesses, and government-guaranteed loans to cover companies' liquidity needs (‘COVID-19 loans’).

In an article published in the Swiss Journal of Economics and Statistics, researchers from KOF and the University of Lausanne examine the extent to which small and medium-sized enterprises (SMEs) have made use of these instruments. They analyse the data from a representative survey of 1,011 self-employed individuals and business owners conducted in mid-April. Two-thirds of the business owners surveyed had to shut down all or part of their operations during the April lockdown. 42 per cent stated that they had made use of at least one of the three support measures available, while 8 per cent have utilised all three measures.

Debt levels have had the greatest impact on borrowing

This analysis shows that companies whose operations were restricted by law during the lockdown or which suffered a sharp drop in sales in April owing to a lack of customers were, as expected, more likely to have made use of government support. Their recourse to short-time working in particular can be well explained by the fact that they were directly affected by the coronavirus crisis. However, this is by no means 100 per cent true: not all companies that had to shut down completely, for example, have claimed support, whereas many of those that were able to continue their operations have claimed such assistance. The researchers therefore looked for other factors that have influenced firms’ recourse to support.

They can show, for example, that physical proximity has played an important role: companies have been more likely to make use of short-time working if their staff are seated particularly closely to each other in the workplace. Short-time working and the payment of income support thus seem to have helped to contain the virus by reducing the need for close proximity at work.
This analysis also shows that firms already in debt have tended to seek government support in the form of COVID-19 loans. The researchers believe there are three possible explanations for this:

1. It is conceivable that these measures will be used primarily by financially unstable companies – i.e. those that are also most likely to need support.
2. The reluctance to apply for government support and incur further debt could be lower for firms that are already in debt.
3. Companies already in debt may have replaced maturing debt with cheaper COVID-19 loans.

Of all the variables examined, the level of firms’ indebtedness has had the greatest influence on their receipt of COVID-19 loans. This indicates a certain habituation effect: companies that are already accustomed to taking on debt are less inhibited in this respect. On the other hand, businesses that are not accustomed to taking on debt are more reluctant.

Language regions and gender also play a role

There are also differences according to language region. For example, companies in Italian-speaking Switzerland have been more likely to resort to loans than those in the rest of the country. It also appears that businesses managed by men and non-Swiss nationals have made slightly more frequent use of these loans. In general, taking out loans can be explained less well by firms’ objective COVID-19 situation than their recourse to short-time working and income support. When deciding whether or not to take out a loan, individual differences in the behaviour and attitudes of business owners obviously play a greater role than when deciding whether to apply for short-time working or income support.

Finally, this analysis also reveals that the coronavirus crisis has hit SMEs more or less randomly: the extent to which they have been affected by the crisis is almost totally unrelated to their financial results in the year before the crisis. This finding suggests that government intervention has been necessary: without it, many ‘healthy’ – i.e. financially sound – companies would have had to scale back or shut down their operations, which would have made the economic damage from the crisis even greater. The fact that entire sectors were hit, through no fault of their own, by an exceptionally rare event also implies that the incentive problems normally associated with government support measures for companies were very limited in the first few months of the coronavirus crisis.

Adjustments recommended for loans

The researchers conclude that the measures that supported earned income (i.e. short-time working and income support) achieved their objectives more quickly than the COVID-19 loans. In the former case, the direct effects of the lockdown and firms’ financial situation played an important role. Borrowing, on the other hand, was driven more by previous debt and other variables that were objectively of little relevance.

The researchers believe that it would therefore be worth considering tailoring these loans more closely to the financial situation of individual companies. For example, the terms for repayment of the loans could be made dependent on future profits – similar to student loans, which only have to be paid back when students are earning a certain level of income.
According to the researchers, it is important that political support measures be gradually scaled back – or replaced by measures that promote structural change. It must be ensured that financially viable companies are maintained as going concerns. However, unavoidable corporate bankruptcies and necessary restructuring should not be prevented.