Jess Christman, who runs a Scottish timber business, recalls that banks were “throwing money” at him during the Covid-19 pandemic as Rishi Sunak, then the chancellor, sought to help small companies stave off collapse.

Christman, who runs Black Isle Firewood, near Inverness, which produces firewood and sawn timber and huts for the tourism market, ended up taking out a government-backed loan under the coronavirus business interruption loan scheme (CBILS).

However, he had been struggling to repay the money because the economy remained “in the doldrums” until his lender, Close Brothers, allowed him to extend the length of his loan from five to nine years.

“CBILs were a lifeline. I would have had to shut the business without them,” he said of the firm he founded in 2010 after he leaving previous job at a housing association.

“The business had been running along fine before Covid. But since then things have not picked up. It’s been pretty quiet because the economy is not doing well and people have been sitting on their hands. My lender was willing to extend and so I was lucky. I know people who have gone bust as a result of CBILs,” he added.

CBILs were one of three main packages of £77bn of government-backed pandemic loan support disbursed under emergency conditions to pump money into small firms and prevent economic collapse. The loans by banks and other financial institutions were administered by the state-owned British Business Bank (BBB) and lenders made decisions on applications.

Four years after the pandemic, many smaller businesses are struggling to repay these loans due to the economic downturn and higher inflation, which has reduced sales and pushed up costs in wages and energy bills.

The Federation of Small Businesses (FSB), a trade association that represents small firms, believes those who took out CBILs should be given more flexibility to pay them back, with higher debts hampering investment.

The best-known scheme was the bounce back loan programme, launched in May 2020 as a life support for small businesses during lockdown. It offered fully government-guaranteed bank loans of up to £50,000 or 25% of turnover. Paperwork was minimal; applications were self-certified and there were no credit checks.

A quarter of all businesses made use of this scheme but it has since proved controversial with an estimated £1.8bn in loans flagged as suspected fraud. UK companies drew £46.59bn through the bounce back scheme, with 74% of loans by volume fully repaid or on track for repayment.

However, lenders have resorted to the government payback guarantee for about 18% of all bounce back loans by volume – with a value of about £9bn as of December 2023 – mainly because businesses have gone bust.

CBILs were offered up to £5m for businesses with a turnover under £45m and loans were 80% government-backed. Companies drew £25.84bn, with 91% of CBILs by volume currently repaid or on track for repayment. The government guarantee has so far been called on for 5.35% of the CBILs by volume.

The third scheme, the coronavirus larger business interruption loan scheme (CLBILS), was aimed at companies with annual turnover of more than £45m.

Businesses struggling to repay bounce back loans can access a “pay-as-you-grow” scheme giving flexibility including repayment holidays or extending loan terms up to 10 years. About 34% of businesses with bounce back loans have taken up pay-as-you-grow options.

However, there is no such formal scheme available to businesses with CBILs – any loan extension is purely at the discretion of the bank.

Martin McTague, the FSB national chair, said: “While CBILS was a vital part of the initial support brought in to help businesses stay afloat during the pandemic, we warned at the time that the lack of flexibility around repayment terms would store up problems for the future.

“We asked for CBILS loans to be offered some of the same pay-as-you-grow help that bounce back loan applicants were given. Some CBILS loans had a floating rate of interest, and then interest rates have soared far higher than those taking out a CBILS loan at the time could have forecast.

“These higher repayment costs for thousands of small firms come at a time of higher energy bills, a rising tax burden, and increased wage costs.”

Kate Nicholls, the chief executive of the trade body UKHospitality, said: “One of the many obstacles to growth for the hospitality sector after the pandemic has been the repayment of Covid-related loans, with high interest rates increasing payments and making it hugely challenging for many businesses to thrive in the challenging economic climate.

“This is yet another cost that limits investment into the sector and we continue to urge the government to allow refinancing of these loans to enable repayments over a longer time period and without penalties. This would offer affected businesses the support they need to survive in the medium to long term, and it also frees up capital for further investment in hospitality, serving Britain’s wider economy a much-needed boost.”

John Donald, 73, whose Edinburgh-based firm Robop took out a £160,000 CBILS loan in 2020, began struggling when he was faced with £3,000-a-month repayments from 2021, when his business was still slow to recover.

Donald co-founded the company, which supplies a patented autonomous robot that looks like a Peregrine falcon and deters birds from nesting on buildings. Customers include Network Rail and Caterpillar.

“We founded the business a day after 9/11 and we have been through economic shocks before including the 2008 financial crisis and the 2016 Brexit vote where we saw our UK orders fall. But up until the pandemic we were growing at 330% a year,” Donald said.

“We assumed it would take six months to recover from the pandemic. Once repayments started and money was not coming in we really struggled and wanted to extend the terms but that did not happen.”

Eventually, administrators were appointed and the firm went into insolvency in 2022. Donald bought back some of the assets and has set up a new firm, Robop Systems Engineering.

Some firms are still struggling to repay bounce back loans even though firms have access to a more lenient repayment schemes. The Money Advice Trust, the charity that runs Business Debtline, which helps struggling firms, said 35% of its clients had bounce back loan debt, owing an average of £25,434.

Jane Tully, Money Advice Trust’s director of external affairs and partnerships, said: “The financial fallout from Covid is still having an impact on many small businesses, a situation that’s been worsened by the high cost of living. Our advisers at Business Debtline are hearing from people now struggling to repay loans, including bounce back loans, taken out during the pandemic.”

Dave Hughes, 62, who runs Hotbox, a not-for-profit music venue in Chelmsford, said he had struggled to repay a £50,000 bounce back loan partly because other costs had risen including rent.

He set up the venue seven years ago after a career in business, when his son was studying music at university. “ I always wanted to have a music venue,” he said. “But the last two years have been tough. We were closed during Covid for the best part of two years … Then inflation went through the roof and electricity costs have gone up and also people spend less.

“I was completely debt-free pre-Covid. We have been landed with debt through no fault of our own.”

The British Business Bank said: “Where CBILS borrowers are in difficulty, in many cases lenders can extend the original loan terms to a maximum of 10 years if they need help to reduce monthly repayments. We would strongly encourage those who need this extra help to speak to their lender.”

The UK government said: “We have amended the loan rules to give lenders the option to extend terms from six to a maximum of 10 years, to help borrowers in need of financial assistance reduce their monthly payments and repay their loan.

“During the pandemic, we also covered interest payments for the first 12 months of borrowing for CBILS borrowers, helping thousands of businesses stay afloat.”

However, many believe further action is now needed. McTague said: “What was the point of supporting these businesses through the disruption of Covid, to the tune of billions of pounds, if we allow them to go to the wall now – and with their debts unpaid? Helping them to repay their CBILS debts on a schedule that’s manageable is surely much more sensible for all sides.”