A report issued by the Bank of England revealed that the increasing level of debt among SMEs has caused the central bank to expect a rise in the number of small businesses collapsing this year as the economy recovers and restrictions on landlords issuing winding-up orders are removed.
The quarterly financial stability update revealed that the level of debt taken on by UK businesses increased moderately throughout the pandemic with a larger increase of borrowing from SMEs that, the Bank of England states, had not previously borrowed before.
The report highlighted that many of these businesses would have not met pre-pandemic lending criteria.
It also revealed that SMEs accounted for two-thirds of the £79bn increase in UK corporate debt between the end of 2019 and the first quarter of 2021 as they used government Covid-19 emergency financial support to stay afloat.
One third of SMEs have a level of debt of more than 10 times their cash in the bank, versus 14% before Covid-19 hit. The percentage of those with high debt relative to both cash balances and money coming in trebled from 3% to 10% over the same period.
Mark Supperstone, managing partner, ReSolve commented: ‘This news is not a surprise considering the difficulty companies faced during Covid-19 and the availability of cheap debt thanks to government support.
‘What is important to remember is high debt, in and of itself, is not dangerous. Leverage, in many ways, is a good thing especially if cash flow is steady and plentiful and the interest rates are low.
‘However, before new debt is taken on, businesses need to have properly planned for repayment and budget responsibly ensuring that proper cash flows are prepared. If directors envisage problems with repayment on the horizon, then they should speak to their lenders as soon as possible.’
The report also covered risks to the financial sector, with the Bank of England highlighting that regulations need to be developed quickly in order to address the ‘potential future instability’ of the cryptoasset market. The central bank at the moment describes the risk of cryptocurrency as ‘limited’.
The Bank of England stated that it is monitoring the risks highlighted closely and is working with UK and other international authorities to make market-based finance more ‘resilient to shocks’ so that financial markets can support the economy in ‘bad times as well as good’.
