What their owners need to know

Back in the olden days of three or four television channels, just being on the air was a sign that the information could be trusted as relatively accurate. 

It’s an issue that the BBC and other traditionally authoritative news sources are grappling with – keeping and attracting audiences while maintaining a reputation for accuracy against sensationalist competitors with less adherence to the accuracy of the information they publish. 

It’s a long and roundabout way of saying that some sources are more important than others – the Bank of England for example – and when they speak about the current and future state you can assume they believe what they’re saying. 

Is liquidation possible with a bounce back loan?

Last week they released their latest quarterly stability report which contains some stark and striking analysis about the situation facing many small and medium sized businesses adjusting to a tricky and unpredictable Autumn trading period.

According to their findings, the Bank of England now estimates that over a third of the UK’s small businesses are “highly” in debt – more than double the level since pre-Covid trading conditions. 

They are also predicting a significant rise in the number of small businesses that could collapse early next year when all restrictions creditor actions including winding up petitions are finally lifted for good. 

The Financial Policy Committee said: “Although debt appears affordable in the near term, insolvencies are likely to rise from 2021 Q4 as government support is withdrawn as planned.”

The report highlights that many of these small to medium sized businesses that have amassed unsustainable debt had never borrowed before and some would not have met pre-pandemic lending criteria. 

It was only the relatively easy to access schemes such as bounce back loans that enabled them to access the required funding quickly, which was the intended purpose of the scheme.

So it’s ironic that many of the companies that took out bounce back loan borrowing, some being the first business borrowing they’ve ever taken out, are the ones most at risk because of the debts owed on those same loans. 

“The increase in debt – though moderate in aggregate – has likely led to increases in the number and scale of more vulnerable businesses.

“As the economy recovers and government support, including restrictions on winding up orders, falls away, business insolvencies are expected to increase from historically low levels.”

The bank said that SME’s accounted for two-thirds of the £79 billion increase in the UK’s corporate debt between the end of 2019 and the first quarter of 2021 as they accessed emergency funding to support themselves with enforced closures and a collapse in trade and trading conditions.

Further analysis shows that a third of SMEs have a debt level more than ten times their cash held in the bank which is up from 14% before the pandemic and subsequent lockdown. 

The percentage of those with high debt relative to both cash balances and money coming in also more than tripled during the period from 3% to 10%. 

With their official outlook for the economy remaining as “uncertain”, the Bank of England are signalling to businesses both large and small that even if the threat of Covid-19 fades, the outlook will still likely remain turbulent until we’re well into 2022.

The Federation of Small Businesses (FSB) has described the current situation facing their members as a “Sword of Damocles” hanging over them. 

They highlight supply chain hold-ups, staffing shortages and tax rises as additional threats to bounce back loan and VAT arrears and are already lobbying the government for help before the Chancellor delivers his autumn budget later this month. 

Storm clouds are gathering but there is still time to act

Mike Cherry, national chairman of the FSB, said: “Supply chain problems are hitting hard alongside spiralling employment costs, while the consumer-led recovery could be losing steam. 

“Retail businesses are nervous about their peak Christmas season, with an opaque winter Covid plan likely to see trade restrictions installed at just a week’s notice. With a National Insurance hike that could place 50,000 people out of work which could not come at a worse time, it could be a difficult winter ahead.”

While there may be some surprises in the forthcoming budget, many analysts are predicting that businesses need to fasten their seatbelts for a bumpier ride than most were expecting heading into the first relatively unrestricted Christmas trading period for a year. 

With energy prices and inflation rising ominously, these are still forbidding shadows compared to the spectres of bounce back loan arrears and other debts that need a response from their borrowers now. 

The best response in these situations is usually always to get some professional advice before you decide how you will act. 

Our free initial consultation for business owners and directors gives them a chance to highlight their main concerns and worries and let us focus on the most immediate and pressing issues that might menace their companies right now. 

Once we have a clearer understanding of their situation, we’ll be able to provide a list of options available to them, which might give them more freedom and choices than they previously believed they had. 

But waiting to act will only ensure that the room to maneuver eventually gets tighter until there’s none left at all.