One third of UK small businesses are now highly in debt, according to the Bank of England – more than double since pre-Covid.
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.
In its quarterly financial stability update, the bank warns that many of these small businesses in unsustainable debt had never borrowed before and some would not have met pre-pandemic lending criteria.
The central bank said 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 just to stay afloat.
One third of SMEs have a level of debt of more than 10 times their cash in the bank, versus 14 per cent before Covid-19 hit. The percentage of those with high debt relative to both cash balances and money coming in trebled from 3 per cent to 10 per cent over the same period.
“Although debt appears affordable in the near term, insolvencies are likely to rise from 2021 Q4 as government support is withdrawn as planned,” the Bank of England’s Financial Policy Committee said.
The widely praised furlough scheme to support staff expired at the end of September, while the generous Bounce Back Loan scheme, with its loose lending criteria, was replaced in March by the more onerous Recovery Loan Scheme, which many businesses complain about accessing.