Businesses in the South West have been getting increasingly into debt during lockdown, with credit card bills and overdrafts mounting and fear of ‘finance crunch’ for smaller firms looming
A year from the start of the pandemic, many business owners are increasingly reliant on costly sources of borrowing such as overdrafts and credit cards, a Business West survey has revealed.
Four in ten of the 550 businesses that responded reported a higher level of indebtedness than a year ago, whilst a similar number 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 per cent of firms seeking finance opted for the Bounce Back Loan Scheme which offered favourable interest rates and flexible repayment terms.
Salisbury-based 365 Linen Hire, which provides tablecloths and napkins to the weddings and events industries, highlights how emergency borrowing has taken the strain for many COVID-19 impacted businesses.
Its Manager Richard Gould said that as hopes were dashed of the economy unlocking earlier in the year, the business sought out BBLS funds to gear up for a summer reopening, having “held out as long as possible”.
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
Business West Managing Director Phil Smith
The use of overdrafts and credit cards is also relatively high – at 22 per cent and 19 per cent – considering that these sources of finance are more expensive than government backed emergency finance.
They are also more common than the formal government backed Coronavirus Business Interruption Loan Scheme (CBILS), which only 16 per cent of respondents chose. The percentage of businesses borrowing money from family and friends is also quite significant, at 11%.
Bristol-based marketing agency Feisty Consultancy was one of the businesses that complained of receiving a rough ride from their banking provider over the past 12 months.
“During the first lockdown at least, the banks were helpful in reducing/removing fees,” said Managing Director Vikki Little. “But this stopped some months ago and hasn’t been reinstated, despite the fact that the situation is now worse for many businesses. I wrote to my bank regarding this and was told ‘tough’ essentially.”
If the increased prevalence of short-term borrowing wasn’t worrying enough for the state of business finances, it is particularly so for the self-employed.
Two fifths of respondents identified credit cards as their main source of financing during the pandemic – a finding which suggests that many who fell through the cracks of government support schemes were unable to access cheaper, alternative borrowing.
Against this background, Business West is concerned about a potential ‘finance crunch’ coming for small businesses. With repayments starting on government backed loans and the level of debt from financial institutions and others, the burden of this debt is expected to act as a drag on business recovery.
Unsurprisingly, 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 past three years, with responses consistent across both the services and manufacturing sectors.
“It is dreadful,” said Val Hennessy of the International House language school in Bristol. “Virtually no income and little prospect of a real increase in income in the near future as international travel is banned or the costs of travelling to the UK for students is too off-putting. We cannot risk borrowing any more because the future is so uncertain.”
Stephen Sage, Managing Director of ACES, an electronics firm based in Bristol, said that along with school closures: “Social distancing measures have slowed our production along with…home working,” before adding: “material shortages have also compounded the problem.”
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%), with many delaying growth plans and experiencing reduced profit margins.
Business West Managing Director Phil Smith said: “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.
“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% 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.”
