Concerns have been expressed after the amount of debt taken on small businesses topped £100bn last year – with more companies seeking help in the North East.
Almost half of SMEs in the UK applied for some form of external financial support last year, according to the British Business Bank, a rise from one in eight firms in 2019. Take-up was highest in the North East, thought to be because local lockdowns placed higher burdens on businesses.
That led bank lending to small firms to rise 82% to £104bn. Many of the firms taking loans did so to help cash flow, sparking warnings that late payment by bigger companies is putting hundreds of SMEs at risk of collapse. Around 40% of small firms say the debt they have taken on is “unmanageable”.
The Federation of Small Businesses (FSB) has called for Government-backed loans to be adapted so that companies only start to pay back the amounts owed when they are profitable again.
The plea from the FSB has come as Bank of England governor Andrew Bailey warned that the pace of economic recovery might not be as quick as some are hoping.
FSB chairman Mike Cherry said: “Of the small firms that have recently accessed finance, four in 10 now describe their debt as ‘unmanageable’.
“Many of those in the very hardest hit sectors, not least events, travel and those at the heart of our night time economies, accessed loans last summer in the hope that we’d be out of the woods by Christmas. A lot of them do not fit the narrow definitions of frontline retail, leisure and hospitality so have received little by way of direct government support.
“That three quarters of small firms are accessing finance to help manage cashflow underscores how Covid-linked disruption is exacerbating our late payment crisis, a crisis which destroys 50,000 firms a year at a cost of at least £2.5bn to the economy. Big corporates need to recognise that treating suppliers like credit lines is self-defeating, serving only to embed stress and vulnerability into supply chains.
“The question now is, what steps should policymakers and banks take to ensure emergency debt delivers value to the economy? More than half of those with facilities say a student loan approach – whereby repayments are only made once a firm is profitable again – would mark a helpful way forward.”
Mr Cherry was speaking after the British Business Bank reported that a third of small businesses expect to shrink in the next 12 months while 4% are likely to close. The bank said there could be significant further demand for funding throughout 2021 as businesses sought to move on from the pandemic and pivot towards growth, adapt to life outside the EU, improve productivity and transition to a new net zero economy.
The report showed that nine in ten (89%) businesses sought external financial support in the past year did so because of the impact of Covid-19, with 75% of these SMEs seeking external financial support to help with cashflow. Only 8% sought finance to change their business model and 7% to invest in the digital capability of their business.
The National Audit Office last year revealed estimates that between 35% and 60% of borrowers might default on their loans. The first payments are due in two months as the Treasury has been picking up interest payments until now.
Chancellor Rishi Sunak used last week’s Budget to set out a new Recovery Loan Scheme to replace previous coronavirus loan packages, allowing businesses of any size to apply for loans from £25,000 up to £10m through to the end of the year, with the Government providing lenders with an 80% guarantee.