With businesses unable to postpone interest on government-guaranteed loans, up to three million workers and more than 750,000 small and medium-sized enterprises are at danger.
The banking lobby group TheCityUK said the recapitalization of such loans is "important" in protecting small and medium-sized businesses and need help tackling debt that could "retain or pull them under."
Their report calls for the development of a new student loan-style system, where companies can turn unmanageable loans into tax liabilities that are assessed as mean.
The government has guaranteed nearly £ 43bn in loans to companies around the world, with the Treasury digging hard to support the coronavirus epidemic reach a faltering economy.
Since ministers told Britons to remain at home unless they had to shop for food in March, Chancellor Rishi Sunak vowed to do "whatever it takes" to help the companies that decision would decimate.
This included the introduction of three government-backed loans, the CBILS (Coronavirus Business Interruption Loan Scheme), a similar program for larger companies called CLBILS, and the bounce-back loans that support some of the smallest businesses.
The Treasury backs more than 80 percent of the loans – up to 100 percent – but the guarantees are to the lender rather than the borrower, and it will still be the default for firms who are unable to meet the repayments of their loan portion.
Repayments are expected to begin in March 2021, but TheCityUK cautioned that despite furlough systems, there was a need to "act fast" and rent deferments are due to end.
As suggested by the group chaired by HSBC chairman Mark Tucker, the UK Recovery Company will turn the loans into "new products that allow them to handle their debt in a more sustainable and realistic manner without being placed into the default"
The proposed Business Repayment Program would see the loan balance turned into a tax liability and repaid by the tax system for those who use the Bounce Back Loan Scheme or CBILS loans below 250,000, just as student loans are now repaid. Larger loans under the CBILS will be transformed into an unsecured loan or preferred share capital.
Sir Adrian Montague, Chairman of the board of directors of TheCityUK, said: "Covid-19 is a 100-year phenomenon that has caused unprecedented economic harm."The support schemes supported by the government were the vital sandbags that kept back the flood, protected businesses, and saved jobs.
"However, with hard market conditions expected to continue, it will be difficult for many SMEs to pay back those loans. To ensure a successful recovery, action now needs to be taken to help them retrench, rebuild, and return to growth in a sustainable way."
Omar Ali, chairman of the Technical Working Group on Recapitalization said "hundreds of thousands of companies" will struggle with the debt they built up during the pandemic.
He added: "Our research indicates that as early as the autumn of this year several industries could be in difficulties."That is why taking action now is essential if we are to help companies regain a secure footing as we emerge from the pandemic and eventually support the economic recovery of the United Kingdom and improve their potential growth return."