A new report has warned that if the Covid-19 economic downturn is as severe as the financial crash of 2008, more than one in four hospitality businesses in Scotland could go bust, with 58,000 jobs lost.
Academics at the University of Edinburgh Business School, in collaboration with Wiserfunding, a London-based financial technology company, looked at the financial statements of 5,000 Scottish companies in the tourism and hospitality sectors and considered their profitability and levels of debt. The sectors employed 209,000 people in 2019.
It was found that a ‘mild stress' scenario, equivalent to the 2008 crash, with some downward adjustments, resulted in 28% of firms defaulting, costing around 58,520 jobs.
In a more severe situation, assuming a second prolonged lockdown, the level rose to 43% – almost half of all hospitality businesses and around 89,870 jobs.
The study also found that most medium and large companies were more at risk of defaulting than their smaller competitors, which have leaner structures and lower fixed costs, so can adjust faster to challenging conditions.
Dr Galina Andreeva, senior lecturer in management science at the University of Edinburgh Business School, said: "We hope that the results of our study will be useful to governments and business managers to decide where to focus support during the next phase. Our estimates should provide an idea of the required intervention in order to assist the industry through these difficult times.
"Our results confirm that the current government efforts to support the sector are going in the right direction. However, we would recommend support tailored to company size to maximise impact. Firms that show the highest level of adaptability should be rewarded and offered additional support to overcome the crisis, in order to increase the chances of success in the deployment of public funds. The withdrawal of current borrowing schemes should be carefully planned in order not to create additional shocks to companies with high debt levels."
Dr Gabriele Sabato, co-founder and chief executive of Wiserfunding, added: "The picture that comes out of our models is providing a frightening, but also encouraging message for SMEs. Although they have been severely affected by this terrible pandemic, they are also the ones that can adapt faster and lead the recovery.
"The financial industry should carefully consider the results of this study when setting their lending criteria in the post-CBILS (Coronavirus Business Interruption Loan Scheme) world in order to target the allocation of their funds at boosting the UK recovery."