This is twice the levels seen during the height of the pandemic in the first quarter (Q1) and second quarter (Q2) of 2020. In 2020, Q1 saw 23% of banks reporting loan defaults, and Q2 which reported 22.5%.
Medium businesses in Q3 of 2020 sat at around 5%, this has decreased significantly one year on with the figure sitting at -5% in Q3 of 2021. For large businesses the figures have sat relatively low for 2021 compared to 2020 with below 5% of banks reporting loan defaults throughout the year. In 2020 the figure peaked at 20% in Q4. This is less than small businesses now.
At the same time, there has been a drop-off in demand for lending by small businesses with 13.4%, reporting a demand for lending to small businesses fell in the third quarter (Q3) of 2021.
This contrasts to a substantial increase in demand for lending by large companies with a majority of banks, 20.3%, seeing increased demand by the biggest businesses.
The Credit Conditions Survey, which was conducted between 31 August and 17 September 2021, is based on lenders’ own responses to the survey and are reported as net percentage balances.
Michael Mulligan, insolvency partner at law firm Kingsley Napley said, ‘Small businesses continue to be hard hit by the dual impacts of Covid and Brexit and by recent supply chain bottlenecks. The Bank of England credit survey shows that small companies are increasingly defaulting on their loans.
‘We can see that SME businesses are being hit hardest as at the beginning of the pandemic, these businesses had access to support loans that were easier the get and at a lower interest but those only helped during the short term.
‘With many businesses not regaining its pre-pandemic numbers many are now in crisis with cash flow issues leading to an inability to pay suppliers as well as to service loans and pay suppliers’.
The Bank of England’s Credit Conditions survey shows that it is expected that in the fourth quarter (Q4) the figure for loan defaults for small and medium-sized businesses will increase further but will remain unchanged for large businesses over the same period.
Mulligan concluded: ‘There will inevitably be an increase in insolvencies and commercial disputes in the coming months as a result, particularly as temporary insolvency law measures and fiscal support also come to an end. With the prospect of an interest rate rise on the horizon, in addition, pressures on smaller businesses will only increase in Q4.
‘Company directors worried about their cash flows and how they will manage their money in the final third of this year should seek advice from relevant professionals sooner rather than later.’
The Bank of England confirmed that the next Credit Conditions Survey which will cover Q4 of 2021 will be published on 13 January 2022.
