South West businesses are piling on debt during lockdown with credit card bills and overdrafts mounting and fear of a ‘finance crunch’ for smaller firms looming, according to a new report from Business West.
A year on from the start of the pandemic, business finances in the South West have been badly damaged, with many business owners increasingly reliant upon costly sources of borrowing such as overdrafts and credit cards, the survey reveals.
Forty percent of the 550 businesses that responded to the survey reported a higher level of indebtedness than a year ago, whilst a similar number (43 percent) had six months or less of cash reserves remaining, laying bare the huge financial cost of coronavirus despite extensive government interventions in the economy.
With pressures on firms growing after multiple lockdowns, 28 percent of businesses seeking out finance opted to utilise the Bounce Back Loan Scheme (BBLS) – a government-backed initiative offering favourable interest rates and flexible repayment terms, but this scheme has now ended.
The use of overdrafts and credit cards – sources of finance are more expensive than government-backed emergency finance – by regional businesses is also relatively high, at 22 percent and 19 percent respectively.
They are also more common than the formal government-backed Coronavirus Business Interruption Loan Scheme (CBILS), which only 16 percent of respondents chose, typically larger businesses within the survey respondents.
The percentage of businesses borrowing money from family and friends is also quite significant, at 11 percent.
Business West says it is concerned at a potential ‘finance crunch’ coming for small businesses. With repayments starting on government-backed loans and the level of (often high cost) debt from financial institutions and others, the burden of this debt is expected to act as a drag on business recovery.
After a year of lockdown restrictions, almost half of the 550 participants reported a deterioration in their cashflow, taking this to the lowest point in the last three years, with responses consistent across both the services and manufacturing sectors.
Aside from widespread financial worries highlighted by the survey, the region-wide study also found that almost 40 percent of South West employers had experienced staffing issues as a direct result of school closures.
Over half of respondents reported that their turnover, profitability and cash flow have been negatively impacted as a result of the pandemic. The percentage of businesses impacted in the retail, tourism, food and drink, and consumer services industries is even worse (over 60 percent), with many delaying growth plans and experiencing reduced profit margins.
Despite the pain of the past 12 months, businesses are remarkably upbeat regarding the future prospects of the UK economy, with business confidence also showing signs of lifting following government’s announcement of an irreversible roadmap out of lockdown in England. On both measures, this represents a marked uptick when compared to the last quarter’s results.
Business West managing director Phil Smith said: “Whilst the UK’s successful vaccination programme provides genuine light at the end of the tunnel, it would appear that businesses will have to wait a little while longer before they are able to bask in the glow of a dawning economic recovery.
“There have been few winners and very many losers as a result of the pandemic, a good proportion of whom have taken on added debt to help see them through.
“In the best-case scenario, we will see pandemic related debts repaid quickly as business activity begins to ramp up and accelerate as lockdown restrictions are lifted. In the worst case, a mounting debt burden stymies business growth and proves a long-term drag on the region’s economy.
“To see businesses utilising the flexibility of the BBLS is pleasing. However, the fact that more and more businesses are turning to credit cards and overdrafts to solve cashflow issues is concerning.
"The reliance on friends and family may also be interpreted as a market failure that government and lenders would be wise in addressing.
“We are worried about small businesses and the self-employed’s access to suitable finance during the recovery period. At the end of March both BBLS and CBILS closed, and CBILS was replaced by the successor Recovery Loan Scheme.
"However, this is available via commercial bank lending and is only government-guaranteed for 80 percent of the loan. Our findings highlight a looming finance gap for smaller firms, given the particular finance needs of smaller businesses, who appear to not be utilising CBILS, perhaps because it is harder to access this more formal bank form of financing. We think further government finance schemes for these smaller firms may be needed.
“After business’ most challenging year in living memory, it goes without saying that eyes remain fixed on the roadmap out of lockdown, as only then do we have the realistic prospect of healing the wounds inflicted by the pandemic and repairing business finances.”
A detailed report of the survey’s findings can be downloaded at https://www.businesswest.co.uk/resources/quarterly-economic-survey-q1-2021