Covid debt drowning small businesses to the tune of £104bn

Bank lending to small businesses rockets by 82% as owners scramble for Government coronavirus support

Bank lending to small businesses hit over £100bn last year as SMEs scrambled for Government-backed Covid debt facilities.

Overdraft applications flatlined, despite gross bank lending to SMEs rising by 82 per cent to £104bn.

Around 1.5m Bounce Back Loan and Coronavirus Business Interruption Loan Scheme Covid debt facilities had been approved by the end of 2020.

And nearly one third of businesses accessed grant funding last year, compared to just 2 per cent in 2019.

The pandemic has hit the smallest firms hardest, with 49 per cent of sole trader and self-employed businesses reporting a fall in turnover compared to 38 per cent of businesses with 50-249 employees.

Worryingly, despite the flood of cheap Government lending, one third of small businesses surveyed in the latest British Business Bank report expect to shrink.

Only one in five (21 per cent) were expecting to grow, compared with 28 per cent the previous year.

SMEs in business services (25 per cent) and production (23 per cent) sectors were most optimistic about their prospects for growth over the next year, with businesses in construction and other services sectors least optimistic (both 17 per cent).

Encouragingly, small businesses have amassed a war chest due to the scale of Government support and reduced operating expenses. Deposit holdings have risen by 20 per cent to a record £252bn since the start of the pandemic.

Pivoting towards growth

This year’s Small Business Finance Markets survey suggests funding demand throughout 2021 will remain strong, as businesses seek 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.

Mike Cherry, chairman of the Federation of Small Businesses, pointed out that four in ten of the small firms which have recently accessed finance describe their debt as “unmanageable”.

Many of those businesses are in the hardest-hit sectors, including events, travel and those in the night-time economy, which took out loans last summer “in the hope that we’d be out of the woods by Christmas”.

Cherry reiterated that more than half of those with Covid-19 facilities say a student loan approach – whereby repayments are only made once a firm is profitable again – would be a helpful way forward.

Further reading

Recovery Loan Scheme up to £10m will replace CBILS and BBLS

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...