Record SME borrowing data underline Covid toll on UK business

Almost half of the UK’s small and medium-sized businesses sought financial support in 2020, more than three times the level of the previous year, underlining the toll the coronavirus pandemic has taken on corporate Britain. 

An annual report on SME finance by the British Business Bank (BBB) found that 43 per cent of these companies had received external financing last year, compared to just 13 per cent in 2019. The funding included emergency loans and grants made available by the government to businesses during the pandemic.

The annual Small Business Finance Markets report, published on Wednesday, said borrowing hit record levels in 2020 with gross bank lending up 82 per cent year on year to £104bn. Almost 70 per cent of that was from the two main government-backed coronavirus lending schemes.

A quarter of the UK’s 6m SMEs, defined as companies with fewer than 250 workers, accounted for the extra borrowing, the study said. The record borrowing last year lifted total outstanding SME bank debt to £213bn, up from £168bn the year before.

The report also found that bank deposits increased by a fifth to a record £252bn, illustrating that many companies had taken the opportunity to use the low-interest, government-backed schemes to borrow cheaply and build up a buffer given the uncertain outlook for the economy. This was underlined by a drop in both overdrafts and credit card debt.

The number of SMEs accessing grants rose from 2 per cent in 2019 to 31 per cent last year, according to the study.

A survey published alongside the annual report found that a third of SMEs expected to shrink over the next 12 months with the BBB warning that “many individual businesses” would struggle to repay their debts.

The poll found that 37 per cent of hospitality businesses said they did not expect to be able to repay the loan, reflecting how hard the sector has been hit by successive lockdowns. The Bank of England warned earlier this year that half the money lent through bounce back loans could be lost. 

SMEs have had access to one of two main coronavirus lending schemes since the first lockdown in March 2020, which come with state-backed guarantees.

There is a scenario where a big proportion of lending was not necessary at the end of the day. But there will be businesses that struggle to pay

More than 1.4m small companies have borrowed close to £46bn under the so-called bounce back scheme, which offers loans of up to £50,000, or a quarter of turnover, whichever is smaller, and is fully guaranteed by the state.

Some 92,500 midsized companies have borrowed £22bn through the coronavirus business interruption loan scheme, which carries an 80 per cent government guarantee.

The report by the BBB showed that of those companies accessing either of the two main loan schemes 59 per cent took out loans equivalent to more than a fifth of their turnover.

Catherine Lewis La Torre, chief executive of the British Business Bank, said she could not forecast repayment rates on the government-backed loans until the first instalments were due in May.

She held out hope that a stronger-than-expected economic recovery would put many businesses in a better position. “There is a scenario where a big proportion of lending was not necessary at the end of the day. But there will be businesses that struggle to pay.”

She said the government’s decision in February to stretch repayment terms from six to 10 years “has made an enormous difference” to many companies.

Last year was also a record for the government-backed Start-up Loans used by people to set up businesses, according to the BBB annual report. The total funding drawn down in 2020 reached £126m, up 41 per cent on the previous year.