„Corona loan“ – a ticket to bancruptcy?

The so-called “Corona-Loans” could be a ticket for bankruptcy for most of the companies they are granted to!

Just for clarification: the guarantees for the so-called Corona loans, which are now granted by governments throughout Europe as a support for entrepreneurs, are guarantees for the banks, so they can make money available more easily, because the state guarantees for repayment.

At the same time nobody guarantees for the entrepreneurs – they must pay back these loans fully at the end of the term – otherwise they are simply bankrupt.

However, most of the entrepreneurs will, after the loss of revenues caused by the enforced shutdown, make at best the same turnover as before – so how are they supposed to pay back these loans?

This is not possible in fact – or only then if they have made lots of profit before the corona- crisis – plus if they afterwards spend all their profit for years on repayments. Very unrealistic!

Therefore, for most entrepreneurs these loans – which they would not need in normal business – will be a ticket to bankruptcy. The bank’s credit check is usually in place to assess whether the entrepreneur will be able to repay his loan including interest without becoming insolvent. The state guarantee now overrides or at least massively weakens this mechanism because it guarantees the banks that they will be compensated for potential losses. Consequently, loans are now also granted to companies that subsequently cannot service them – to achieve this, the credit check mechanism has been overridden. These companies will therefore become insolvent with a time lag. The entrepreneurs will have to carry all the damage – and the banks are secured by the state.

The support of the state through credit guarantees (for the banks) only makes sense for companies whose revenues from the crisis are not lost, but only postponed – they can bridge the lack of liquidity during the shut-down with loans and then pay back this loans from the additional revenues coming in after the shut-down on top of their normal revenues.

But I suspect that – counted by number of companies – this is the minority. All other entrepreneurs that take on their Corona credit, which is paid out with little or no credit check, buy a quick ticket to bankruptcy!

It is quite astonishing how little this subject is discussed by all the experts who advise governments in Europe now on the crisis-management!

Michael Stift

Mag. Michael Stift, MBA – after having managed medium-sized and large companies as managing director and board member until the age of 50 – he has been a management consultant for 10 years now, focusing on large and medium-sized companies, advising them primarily on expansion issues, financing and M&A. He studied economics in Vienna and Fontainebleau. E: michael.stift@nbbadvisors.com