- Higher cost of credit and stricter terms than banks weigh risk
- Some business owners use their own money to bridge the gap
- Funding crunch could deliver fresh economic blow to UK
LONDON, Nov 17 (Reuters) – With soaring inflation and a looming recession, many British businesses are struggling to secure affordable bank financing, putting pressure on the embattled British government as it announced A budget aimed at reviving the economy.
British fruit grower Hall Hunter is one of thousands of businesses in the UK feeling the pinch, forcing its owner Harry Hall to consider lending to his own successful company to supplement his expensive bank loans.
“I’d probably be a bank,” said Hall, who can’t get loan products from banks to offset high borrowing costs. He told Reuters he would likely funnel some of his personal wealth into his business to insulate it from 11.1 percent inflation and a recession that could last as long as two years.
Banks are increasingly concerned about extending credit to small firms as rising debt, labor and raw material costs put the business case for lending to them under unprecedented pressure, according to data compiled by Reuters and interviews with lenders and corporate leaders.
A survey by the Bank of England (BoE) published last month showed that lenders expected the supply of credit to the smallest companies with an annual turnover of less than £1m to fall by 10.9% in the final three months of the year.
That could spell trouble for new Prime Minister Rishi Sunak and Treasurer Jeremy Hunt, who on Thursday announced a new, austere financial blueprint seeking to stabilize the economy after their short-lived The former prime minister sent financial markets into turmoil over an unfunded tax cut plan.
Any retrenchment by Britain’s small businesses, which often lack the scale to pass rising costs on to customers as easily as bigger rivals, could deal a fresh blow to the economy.
Such companies account for 48% of private sector employment and have a turnover of around £1.6tn, or 36%, according to the Federation of Small Businesses (FSB), which defines a small business as having up to 49 employees, citing government figures .
FSB Chairman Martin McTague told Reuters he met with Sunak and Hunt on Friday to ask for new financial support for small businesses, including relief on asset sales and research and development tax credits.
“If it’s not small businesses, how do we get out of this? Those industries that have been hit the hardest by the virus are finding it difficult to get banks to support them,” he said.
Economic “make or break”
Banks are still lending, but the higher risk and relative cost of funding small businesses, many of which may not survive, means they often have no choice but to turn them down, four senior banking sources said.
Stephen Pegge, head of business finance at bank lobby group UK Finance, pointed to evidence that credit was more widely available to small and medium-sized enterprises (SMEs) – Bank of England figures showed banks extended loans to firms with a turnover of less than £25m in September. Loans of £6.5bn were revealed.
“Loans are definitely flowing,” Pegg added. “But there’s no doubt that small businesses now have less ability to increase their borrowing because of the slowing economy.”
In fact, access to credit for small businesses in the UK is at its lowest level since 2015, according to the FSB’s quarterly survey of 1,383 small business owners.
The survey found that 42 percent of applications for funding failed in the third quarter, up from 39 percent in the second quarter of this year, while one in five companies seeking financing had a loan rate above 11 percent.
Many small firms have not repaid the state-backed loans extended to prop them up during the COVID lockdown, making their credit profiles increasingly unattractive. Only £4.7bn of the £46bn in loans provided to small businesses under the “bounce back lending” scheme has been fully repaid, according to the latest government figures on 31 July.
“Business owners have to look at other options, one of which is paying out of pocket,” said Claire Burden, a consulting partner at Evelyn Partners.
Douglas Grant, chief executive of Manx Financial Group, and others called for a permanent state-backed loan scheme to protect SMEs, saying it could be “the fundamental difference between success and failure for many companies and our economy”.
Banks ‘have no choice’
As the economy slows, banks are taking a pragmatic approach to lending to avoid costly write-downs, said Naresh Aggarwal, deputy director of policy at the Association of Corporate Treasurers, which represents corporate treasurers.
Loans are still being made, and companies that violate covenants related to their debt are being forgiven, but the support comes at a price.
“Lenders are raising margins on loans,” he added. “For most businesses, they have no choice. It’s not exploitation, it’s a risk premium,” Aggarwal said.
The major banks have set aside hundreds of millions of pounds of extra cash to cover potential losses.
Lloyds Bank provided the most detailed breakdown for the July-September quarter, revealing a 30% increase in the most troubled loan category in its small business sector compared with the end of 2021, hinting at why banks may be proceeding cautiously.
Companies of all sizes have buckled under increasing pressure. Official data last month showed that the number of quarterly corporate bankruptcies in England and Wales hit its highest level in almost 13 years between April and June.
Small businesses face the biggest threat; a quarter of firms have considered closing due to rising cost pressures, according to a September survey of 1,930 firms by commercial bank Tide.
“Businesses are finding it difficult to demonstrate that they are still sound businesses,” said Richard Birch, chief executive of the London Chamber of Commerce and Industry. “But they will only be sound if they can get the loans they need.”
($1 = 0.9843 Euros)
Reporting by Lawrence White, Sinead Cruise and Iain Withers; Editing by Pravin Char
Our Standards: The Thomson Reuters Trust Principles.