BoE says lending to SMEs will rise even if Britain doubles with a new lending scheme
Research by the Bank of England shows that lending to small and medium-sized businesses spikes sharply during the pandemic, even if the UK government opens taps to more credit and increasing debt could become a problem.
The figures show a sharp increase in bank lending to SMEs across the board between December 2019 and December 2020, with for example loans to companies in the transport and communications sectors increasing by 58% and loans to the hardest-hit hospitality sectors increasing by more than 40% .
British Business Bank PLC said 45% of SMEs sought outside funding in 2020, compared to 13% in 2019. UK Finance, which represents banks, told S&P Global Market Intelligence that 12% of SMEs are active intended to apply for funding, while a Another 23% are expected to seek external funding in the future.
The latest BoE figures available for January show that SMEs have taken out additional loans of £ 500m and the annual growth rate has continued to rise to 25.8%. However, interest rates on new loans to SMEs fell to 2.09% in January – well below the 3.37% rate in January 2020.
The British Business Bank figures show that 89% of companies seeking funding did so because of COVID-19, and 75% of companies that did so to boost cash flow.
Although banks are protected from loss by the government guarantee on the loans, those systems will have to end at some point, said John Wright, an analyst at S&P Global Ratings.
“The overall rising debt of SMEs could become a broader issue, especially if government-guaranteed lending systems come to an abrupt end and post-pandemic recovery turns out to be weaker than expected,” he said in an email.
At the start of the pandemic in March 2020, the BoE cut interest rates and launched a term finance program that offered banks cheap funding and increased lending to SMEs.
During the pandemic, banks lent around £ 45 billion to smaller businesses under the 100% government-guaranteed bounce-back loan (BBL) program that allows businesses to borrow up to £ 50,000.
The larger banks have supplied the majority of the BBLs. For example, Lloyds Banking Group PLC had BBLs totaling £ 8.4 billion at the end of Q3 2020, but this has now grown to more than £ 9 billion for more than 300,000 companies.
NatWest Group PLC said it had £ 7.9 billion in BBLs on loan at the end of the third quarter, but had approved 291,000 applications for a total of £ 8.92 billion in early February. Barclays PLC, which approved BBLs worth £ 9.2 billion in the third quarter, has now approved more than 330,000 customers £ 10.36 billion. HSBC Holdings PLC had committed £ 6.3 billion in the third quarter of 2020.
Smaller challenger banks like Metro Bank PLC focused on lending to smaller businesses.
“We have expanded £ 1.5 billion through the government’s lending systems to 36,000 businesses while offering support with payment deferrals, waivers and interest rate markups,” said spokesman George Young via email. The bank’s SME deposits rose to £ 4.4 billion in 2020, up 36% from £ 3.3 billion in 2019.
However, the Bureau of Budgetary Responsibility has found that up to 40% of BBL borrowers can default, which can result in losses of up to £ 33.7 billion. The government has given borrowers an additional six months from May to start repaying.
British Chancellor Rishi Sunak announced another loan program on March 3, the Recovery Loan Scheme, which allows companies to apply for loans of £ 25,000 to £ 10 million with a state guarantee to banks of 80%.
Lending during a pandemic
The BoE figures show that SME lending has skyrocketed with the outbreak of the UK pandemic. After the country passed its first national lockdown in March, lending to SMEs rose from its regular level of around £ 170bn to over £ 188bn in May, remaining above £ 210bn in October, November and December.
The Association of Small Businesses said the proportion of small businesses with some form of debt rose from 56% to 69%, with the proportion calling their debts “uncontrollable” and increasing from 13% during the pandemic to 40% rose.
“A small but significant minority of small businesses have continued to act normally over the past year – especially those who had a well-established online presence before the pandemic outbreak or developed one shortly after the outbreak,” said FSB National Vice Chairman Martin McTague said via email.
“These companies may still have borrowed but not necessarily needed to raise funds. For many, however, and especially for those involved in areas such as events, travel, the creative industries, and our nighttime economy, where human interaction is fundamental and government support has been found to be inadequate – debts are becoming unmanageable. “
McTague said the newly announced tax incentive scheme should be open to smaller businesses to encourage investment. He also said that most debt-laden small businesses need a contingent tax liability approach where COVID-19 loans are only paid back when profits are made.
Prior to the pandemic, many SMB sectors, including information technology, finance, industrial and healthcare, experienced a decline in return on investment between 2017 and 2019, according to S&P Global Market Intelligence.
SMEs were generally more positioned in terms of debt. The share of debt in equity had declined in the three years since 2017 for companies in nearly all sectors, with the exception of real estate, which rose sharply in 2019.
When the pandemic broke out, lending to SMEs rose sharply across the board, which was not surprising. The real estate sector was by far the largest recipient of credit at £ 79 billion, with wholesale and retail in second place with £ 22 billion in loans, just ahead of construction at £ 21 billion. Public administration and defense, identified by the Bank of England as providing educational and cultural services, among other things, saw the largest percentage increase in lending, albeit from a low base.