More than half of UK small businesses are carrying “toxic debt” they might struggle to repay over the next 12 months.
Business sectors particularly vulnerable to toxic debt are hospitality – bars, restaurants and hotels – and anything property based, according to restructuring expert Begbies Traynor.
Company insolvencies rose to 1,446 in September, an increase of 100 over August and 56 per cent up on the same month last year, according to the Insolvency Service.
The Bank of England expects a rise in the number of small businesses that collapse this year as the economy recovers and restrictions on landlords issuing winding-up orders are removed.
The amount of debt owed by small and medium-sized companies hit a record high of £213bn in 2020 after lending to small firms increased by 82 per cent during the pandemic, according to the state-owned British Business Bank.
Government schemes accounted for a third of that lending.
The UK government last year offered to guarantee bank loans through various support schemes, with more than £75bn of debt now backed by a full or partial guarantee by the state. This includes about £47bn in so-called “bounce back” loans that offered up to £50,000 for struggling small businesses with relatively little paperwork.
Today, the British Business Bank announced that over £1bn has been offered through the follow-on Recovery Loan Scheme launched in March, which has arranged 6,200 facilities for smaller businesses. Of this, £823m of small business financing has already been drawn down.
Julie Palmer, partner at Begbies Traynor, told the Financial Times that some small businesses are considering prepack administrations — an insolvency process where a company arranges a deal to sell assets before appointing administrators. That can preserve value, leaving directors able to continue running operations.
However, despite the gloomy analysis, small business owners themselves are bullish about their ability to repay loans. According to a Lloyds survey, only 16 per cent of small business owners are worried about being able to pay off debts, with 54 per cent of more concerned about the cost of debt repayments choking off their ability to invest in their own businesses.