So while business continues whether you’re on holiday or not, it’s a good time to look back on what’s happened to businesses in the second quarter of the year - that covers data from April 1 to June 30 2021.
The Insolvency Service have published their second quarterly bulletin of the year revealing the total number of company insolvencies reported during this period and they show another uptick in insolvency activity.
When you look at the story of 2021 so far it resembles a giant V - recovering the numbers lost in the previous quarter.
The overall number of company insolvencies for England and Wales from April to June 2021 was 3,116 - 31% higher than the previous three months data and 4% higher than the same period in 2020.
This is also the highest quarterly total since the beginning of the pandemic.
The main driver is the increase in creditor voluntary liquidations (CVLs).
Q2 2021 (dark) v Q1 2021 (light)
The 3,116 recorded company insolvencies was made up of:
CVLs made up 90% of insolvency cases in England and Wales between April and June this year with administrations taking 5% of cases; compulsory liquidations reached 3% and only 1% of cases were CVAs.
There were a total of 165 company insolvencies in Scotland in Q2 2020, Up 91 or 32% higher than a year ago. This was made up of:
In Northern Ireland there were 23 company insolvencies, Up 15 or 35% higher than Q2 2020. This was comprised of:
The total company insolvencies for the UK for Q2 were 3,304 - an increase of 814 from the first three months of the year.
The Insolvency Service reiterates that the historic low levels of company insolvencies compared to pre-pandemic numbers are due to several factors - some temporary while others might be more influential in the medium to longer terms.
Along with the unprecedented and historic level of government back financial support measures such as the bounce back loan scheme, suspensions of creditor recovery actions such as winding up petitions and a backlog of cases working through a court system that is still working someway below capacity have all had an influence.
Additionally, the introduction of the Corporate Insolvency and Governance Act 2020 brought in new legal powers including a statutory insolvency moratorium period and court sanctioned restructuring plans.
Since the introduction of the act on 26 June 2020, there have been five companies obtaining a moratorium and a further nine that had their restructuring plans approved and implemented by the courts. These measures are noted by the Insolvency Service but are not included within the statistics as they are not classed as formal insolvency processes.
The liquidation rates figures (a number per 10,000 active companies) tends to give us a clearer picture of the broader trends at work as they indicate the probability of a company entering liquidation rather than the number that actually have.
They are immune to one-off fluctuations or other factors and are more comparable over longer time periods than absolute figures. They indicate underlying trends affecting businesses so we can have a broader view of the direction of insolvency momentum.
The figure is calculated based on the data from a 4-quarter rolling rate per 10,000 active companies so the rates for Q2 2021 used data covering the periods from Q3 2020 to and including Q2 2021.
The liquidation rate for this period is 25.9 per 10,000 companies or 1 in 386 companies being liquidated in the 12 months ending on June 30 2021.
This figure is slightly higher than the previous quarter (25.3 per 10,000 or 1 in 396 businesses) but lower than the corresponding figure from Q2 2020 (36.9 per 10,000 or 1 in 271).
Insolvencies by industrial sector
Compared to the same time period a year ago, every industrial sector has seen a decline in insolvency rates
The three industries that saw the highest number of insolvencies were:
The construction industry continues to have a larger number of insolvencies than any other sector but the total number in the past 12 months is 36% lower than the previous period.
Colin Haig, President of R3, the insolvency and restructuring trade body said: “The increase in corporate insolvencies - to the highest total in 18 months - has been driven by a rise in creditors voluntary liquidations (CVLs) which have increased to pre-pandemic levels.
“It’s hard to say what’s driving this increase in CVLs but it could be that directors of a number of companies have decided they can no longer go on trading as a result of the pandemic, and are opting to close down their businesses by using the CVL process, before the situation deteriorates further.
“What is clear is that the figures show the toll the challenges of the last three months - and the twelve before them - have taken on the business community.
“While many business owners were hoping the lifting of the lockdown would help them, they reopened amid low consumer confidence, a time when people were being encouraged to stay local, and when the economy was still a long way from recovering from the start of the pandemic.
“The formal end of lockdown may have improved their situation but it wasn’t the boost many businesses had hoped for.
“However, the government’s support measures have remained in place over this period and are likely the reason why today’s increase isn’t as severe as it could have been.
“This support has been a lifeline for many businesses, but with the end of furlough in sight, directors now need to take the time to plan for how they’ll manage when this initiative ends.”
The key takeaway from these latest statistics is that despite government support still being largely in place through the coronavirus job retention scheme and statutory demands, winding up petitions and other enforcement measures remaining suspended, company insolvencies have increased relatively sharply.
Bounce back loan repayments are coming due, business rates liability is due to resume and as the remaining support measures are finally wound up and creditors are within sight of being able to take unrestricted action once more, it’s reasonable to assume that by the end of the year if not Q3, these figures will be higher still.
So what can an informed and responsible business owner or company director do - right now - to help their company through the turbulent next few weeks and months?
How about talking?
A problem shared might not be halved but getting in touch with us to arrange a free initial consultation chat will feel like a weight is lifted.
Once we get a better understanding of your unique circumstances, we’ll be able to advise you on what strategic and tactical steps you can take in the short and medium terms to bolster your business.
As the figures are beginning to show, not every company will be able to navigate the storm ahead but there are other options available that we can discuss that could lead to an alternative and ultimately better outcome than trying to rescue an unviable enterprise.
By the time Q3 ends on September 30, many business owners will wish they had extra time available to tackle their most pressing issues.
Make sure you use yours now.
Cleveland Bridge, builders of such iconic structures as the Sydney Harbour Bridge, the Tyne Bridge in Newcastle and the arch at the new Wembley Stadium, has gone into administration.
The company is part of the Al Rushaid Group based in Saudi Arabia, and has been marketed for sale by administrators while staff continue to complete ongoing projects with others remaining on furlough as part of the Coronavirus Jobs Retention Scheme.
The company employs 221 at its Darlington headquarters along with an engineering site in Newport, South Wales and a further 98 contractors. There are also many more companies in the supply chain that will be anxiously awaiting news
A spokesperson for the administrators said: “Cleveland Bridge UK has been a flagbearer for cutting edge British engineering for more than a century.
“But no business is immune to the far reaching impact of the pandemic, which has delayed major infrastructure projects around the world and put significant financial pressure on the teams behind them.
“CBUK is a business with a proud history and a formidable track record of engineering excellence. It also has great potential.”
Kapex Construction and Nobles
Previously profitable Newcastle contractor Kapex Construction Limited has also entered administration in July.
According to their latest accounts filed at Companies House in March 2020, the business had assets of £4.1 million and liabilities of £3.6 million.
There were £433,020 profits on a turnover of £11.6 million and was understood to have an order book of £40 million. This was an increase in profits from the previous year.
Founded in 2016 as part of the Morton Group, Kapex was largely involved in residential construction contracts in the North East, working on projects including commercial building refurbishments and student accomodation.
Work at the various sites the company was engaged with has stopped with staff being sent home while administrators look for a solution.
Liverpool-based Nobles Construction has also gone into administration following tightening trading conditions.
The business applied for but was turned down for a Coronavirus Business Interruption Loan (CBILS) last year which would have been used to resume trading and bring furloughed staff back into work.
Their last project was a large housing development in Warrington with no work being completed from February 2021 as Nobles and the developer were in dispute.
WRW, one of the leading construction firms in Wales with three offices in Llanelli, Cardiff and Bristol, have entered administration after coming under “significant financial stress”.
A statement issued by the business said: “Despite a significant order book of over £60m to be delivered within the upcoming 12 months, a supportive lender, fantastic staff and prospects, regrettably, owing to a series of events the last week, including an unfavourable adjudication outcome, the business was put under significant financial stress.
“The directors have worked tirelessly with their advisors and funders to look for solutions for the business to remain viable.
“Unfortunately, it has been regrettably determined that no viable options remain, and administration is the best course of action to preserve value for stakeholders and creditors. As a result of this, the directors are in the process of placing the company into administration.”
The business has financing secured against property and other assets and despite having several public and private sector clients and a strong supply chain, administrators hope to be able to secure returns for creditors.
Glasgow-based property developer Titan Homes has gone into administration after an extended period of financial difficulties.
The flagship development they are working on is Meadow Road in Glasgow where 45 luxury apartments are being constructed which will now be taken over by a secured lender who will look for a new partner to complete the project either in partnership or as a solo project.
Victoria’s Secret and Arcadia
The UK arm of lingerie store Victoria’s Secret has moved out of administration and gone into liquidation.
The business entered administration in June 2020 after the Covid-19 lockdown became insurmountable.
The administrators asked a judge at the Insolvency and Companies Court for permission as they would liquidate what assets remain and use them to pay dividends to remaining creditors.
Another famous name in British retail - Arcadia - has also appointed liquidators to close the final remnants of the business that collapsed in November 2020.
Their main task will be to repay creditors including HMRC which is owed a “substantial VAT liability” by several of the companies within the Arcadia group.
A spokesperson said: “The liquidation of the Arcadia companies is a large and complex undertaking. Over the coming months the aim is to repay as much as possible of the group’s outstanding debts.”
Some of the names that will be disappearing for the final time include Burton, Dorothy Perkins and Evans.
Gap and H&M
American casual clothing powerhouse Gap announced it was closing all 81 of its physical stores in the UK and Ireland with 1,000 positions being lost as a result.
The closure program is expected to be completed by the end of September 2021 but would continue as an online only business.
H&M have also announced that while their profits have increased over a 12 month period and they would open 100 new stores, they would be closing 350 for a net loss of 250 locations.
Marks and Spencer announced that it was immediately closing all of its physical 29 bank branches with all current accounts being closed at the end of August 2021.
The company said it hoped to redeploy workers wherever possible and confirmed that none of the travel money bureaux branches would be affected.
A spokesperson confirmed that the closures were a result of the surge in online banking and would instead focus on credit cards, insurance, savings and loan products.
Dutch retailer Hema announced it would close all six of its UK branches as it looks to focus more on its core markets in the Netherlands, Belgium and France.
The company launched in the UK in 2014 planning to grow into an international brand but chief executive Saskia Egas Reparaz said that it was unfortunate that the company had to let staff go but it had never managed to build a solid position in the market.
Liverpool School of English decimated by pandemic
The Liverpool School of English which prior to the pandemic taught 5,000 students a year from 80 countries has gone into voluntary liquidation.
Founded in 1999, the school has provided tuition for over 50,000 students in its 20 year life.
As international travel was brought to a halt in 2020 and remains extremely restricted in 2021, the immediate drop in applications and enrollments was catastrophic for the business.
The school looked at offering online classes but interest was insufficient to maintain the school as a viable business. 34 positions will be lost with the closure.
A spokesperson said: “Since March 2020, the company has been adversely affected as a result of the global response to the pandemic. These measures made the business unsustainable after so many years of success.
“The directors have explored every single avenue to keep the business going since March 2020 but ultimately the challenges presented to them by lockdown restrictions and a decision by their insurance company not to pay out on business interruption and infectious disease claims were too great to overcome.
“This is an example of a previously highly successful business being devastated by the global response to the pandemic and, regretfully, it certainly won’t be the last.”
JTF - a midlands based discount warehouse chain - has gone into administration with the closure of over 12 branches and warehouses and the probable loss of 500 positions.
The 40-year-old company issued a statement expressing disappointment and stressing that the pandemic had played a significant role in the downturn with the forced closure of stores wiping out fireworks and Christmas sales which were “two of the largest seasonal items for JTF”.
JTF Chairman Arthur Harris, who bought the chain in January 2020, said: “We believed we had secured a sale of the business but unfortunately the buyer pulled out at the last minute leaving nowhere to go.
“JTF had a fabulous team. I believed I had done everything possible to turn it around, taking the business back into profit within four months but just hadn’t factored Covid into the scenario.”
JTF continues to seek a buyer but in the meantime staff will be able to apply for redundancy.
The majority of 2021 has passed and while it’s still the holiday season, many think things are also taking a rest but this isn’t true.
As expenses continue to mount, the Coronavirus Job Retention Scheme furlough ends next month, CBILS and bounce back loan repayments continue to come due, defaults rise and the ban on creditor actions such as winding up petitions will be lifted.
The time to get advice and make decisions that could change the fortunes of your business is beginning to eke away.
Get in touch with us today for a free initial consultation and we can help you put plans in place that will have an effect before the majority of businesses understand that time has begun to run out.
Not many would have assumed that over a year after taking them that a large minority, if not majority in some industries such as hospitality, bars or nightclubs, would not have been able to begin trading at all in some circumstances, let alone fully.
We’ve covered the problems facing these businesses in earlier blogs as well as the small and closing window of opportunity for companies to implement rescue and restructuring plans ahead of creditor actions such as winding up petitions resuming and the CJRS furloughs ending at the end of September.
But what about sole traders and partnerships facing the same issues?
Limited companies have established legal protections that stop creditors from pursuing individual directors and owners for debts - unless a personal guarantee was given - but sole traders and partnerships don’t have this shield.
When applying for bounce back loans, the British Business Bank stated that sole traders and partnerships had to have been given sufficient information about the borrowing and incurred debts and repayments before any finance was given, under the provisions of the Consumer Credit Act.
If this wasn’t adhered to by the lender underwriting the agreement and providing the funds then they would lose their ability to collect repayments on the loan - although they would be expected to challenge this. The onus would be on the borrower to prove they hadn’t been adequately informed either at the time or during the course of the agreement.
The Consumer Credit Act doesn’t apply to the bounce back loan scheme in its entirety although not all of its protections were removed, meaning the information requirement remained and that the collection of the loans were still regulated meaning that lenders would still have to comply with the relevant regulations should borrowers encounter financial difficulties.
Additionally, lenders were not permitted to ask for or seek any personal guarantees for access to the bounce back loan scheme.
Sole traders and members of a partnership are often used to risking their personal assets when borrowing so would be reassured that under the terms of the bounce back loan scheme, no recovery action can be taken by lenders over either a principal private residence or a primary personal vehicle - their home or car.
This doesn’t mean that they cannot be pursued for outstanding bounce back loan debts or unpaid installments. Their other personal assets may still be at risk of recovery action from the end of September.
One other important caveat partnerships or sole traders who borrowed under the scheme should be aware of - they should not have been in financial trouble when they obtained the finance.
From September 2020, an additional undertaking was inserted into the bounce back loan borrowing conditions making this requirement clear.
The definition of a “business in difficulty” is that partnerships should not have accumulated losses greater than half of their capital in their most recent annual accounts - although this does not apply to firms three years old or less.
For sole traders the requirement was that they should not have been in an active insolvency procedure while they sought the funding.
The biggest problem for sole traders to overcome if they can’t repay their bounce back loans, is that legally, there’s no difference between personal and business assets. This means that any business debt is personally owed and therefore recoverable from personal assets.
Creditors can and will use high court enforcement officers or bailiffs to obtain whatever they can to sell and regain some of their funds.
These too are currently limited (although not if the company was considered insolvent before the Coronavirus lockdowns started in March 2020) but are scheduled to return within ten weeks.
If a sole trader is in financial difficulty and can’t make bounce back loan repayments or other debts then they have insolvency options but not as many as a limited company or even a partnership so it’s even more important that they get professional advice at the earliest opportunity.
Chris Horner, Insolvency director with Businessrescueexpert.co.uk said: “One of the main advantages of running a business as a sole trader or in a partnership is less administration and more agility than a limited company can supply.
“A drawback is that if they meet financial headwinds, then they don’t have the range of protection enjoyed by companies - they have more personal exposure.
“But this doesn’t necessarily mean the worst. If they take action early enough to satisfy creditors including bounce back loan lenders then they can still continue to trade, if viable, and repay their debts while they do it.
“Alternatively, they can take advantage of specific insolvency protection for sole traders or individuals called an Individual Voluntary Arrangement (IVA).
“It operates in a similar way to how a CVA or company voluntary arrangement operates for a limited company allowing them to pay off debt in a series of manageable monthly payments while a proportion of the remaining debt is written off.
“No matter what issues partnerships or sole traders might be facing - if they get professional advice quickly enough, they will have options to change course.”
The bounce back loan scheme might have been a new initiative but the problems if a partnership or sole trader can’t repay it is not.
Even though the scheme was government backed to encourage lenders to be more generous than they might otherwise have been to prospective borrowers, we’re seeing increasing evidence that recovery action is more aggressive and sustained than you may expect.
This is because the government is increasingly demanding evidence from lenders that they have made genuine efforts to recover any debts before they can even begin to apply to have their funds reimbursed.
Given this, if you think you might not be able to repay your bounce back loan or any other borrowing in full, or if you’ve missed payments already - you should get in touch with us as soon as you can.
We offer a free consultation for sole traders or partners where they can outline what issues their business is facing and we can listen and let them know, often to their surprise, that they can take action to save it.
The quicker they act, the more options they will have to choose from and more time to implement them effectively.
The clock is ticking down for creditors actions to be allowed again so why waste any more time?
Of course they operate in their own sector but they have to pay bills, employ staff and provide a valuable service and make a profit to reinvest in growth and development - just like any other company.
But they face a range of unique challenges and constraints too.
Their safeguarding measures will be more stringent than most companies and they will be under closer scrutiny too due to the nature of their existence - keeping children safe, educated and happy.
Not that the challenges of the last 18 month have been anything but normal for institutions, students and staff alike.
Classroom bubbles, home or halls of residence quarantines and entire terms spent moving in-class learning to online platforms for remote learning.
Taking remote learning as an example - schools and colleges have had to make sure that enough students (and staff) have the actual technology to be able to deliver and receive tuition.
This can mean purchasing laptops and tablets, along with necessary software licenses if applicable.
Any establishment that offers accommodation will have seen this income stream vanish along with those that hire their facilities out to other businesses and local communities for sport, productions and corporate events.
With the ongoing disruption to international travel and Brexit restrictions means any business relying on foreign students would have seen severe disruption to this model - as does the idea of remote learning for establishments whose whole business model is based on in-person tuition or residence.
In 2019, Hadlow College and West Kent and Ashford College became the first in the UK to go into educational administration costing the Department of Education some £26.6 million to keep them operating while a permanent solution to their educational provision was found.
When the total support for all colleges in England receiving financial aid was factored in then the total rose to over £40 million.
This includes the provision of £14.4 million in emergency funding to five unnamed colleges in “serious financial difficulty” that received payments in order to prevent them from also entering educational administration.
Significantly the Education and Skills Funding Agency (ESFA) which provided the payment, recognised that the cost and effort of handling colleges in education administration means “it may need to limit the number of colleges in the insolvency regime at any one time,” depending on each case.
The Department for Education said protecting students is “the overriding priority for colleges that have entered education administration” and the most significant costs from the two insolvency cases were related to “supporting the operation of the colleges while they were in administration and in facilitating a long-term solution by enabling the transfer of the provision to other local providers.”
Some money will be recouped from the sale of campus assets which are no longer required for educational provision such as buildings and land but not every college has assets that can be sold to support them.
The National Audit Office also revealed that the government was intervening in nearly half of all open colleges and had spent over £700 million on bailing out and restructuring colleges in the previous 12 months up to September 2020.
The figures for the following year might end up being even worse.
When it comes to borrowing under the bounce back loan scheme, our own investigations have revealed that businesses operating in the education sector obtained over 31,000 loans totalling some £726 million overall - an average total of £23,238 per loan made.
We also calculated that according to official estimates between £109m to £436m could be expected to be written off from repayment.
In an effort to keep the number of education administrations from rising, the government has proposed giving the Education Secretary the ability to force college mergers instead.
The Skill and Post-16 Education Bill currently before the House of Lords, proposes to “extend the existing intervention powers, enabling the Secretary of State to: exercise their statutory intervention powers in circumstances where there has been a failure by a college to adequately meet local needs and direct structural changes (such as mergers) where use of the powers has been triggered under any of the thresholds in the legislation.”
The Bill says it will give “power for the Secretary of State to amend legislation to expressly provide for Company Voluntary Arrangements to be available in education administration”.
Under the current rules, An educational administrator can be appointed by the Secretary of State to take over an insolvent college.
They will have a wider remit than in a standard administration as their job will be to protect courses for learners alongside their statutory duty to secure the best outcome for creditors.
Other industries such as energy, railways and housing associations also have special administration regimes in place to protect vital public services if the provider supplying them runs out of money.
If students have already begun their courses when a college goes into administration or other insolvency proceedings then they will look for another institution to take over the course provision alongside their insolvency duties.
Administration might be the best solution for an indebted education business if new buyers are happy to take on the existing debt and provide new investment, energy and ideas into the institution.
They will have their own plan on how to return to profitability and will be encouraged to do so if at all viable.
Similarly, if the business can otherwise make a profit but is burdened with seemingly insurmountable debt or has been temporarily affected by Covid-19 but is otherwise fundamentally sound, then a company voluntary arrangement or CVA might be suitable.
In return for a proportion of the debt being written off, they will repay the remainder in regular monthly instalments, usually for five years, until it’s cleared. All the while continuing to trade, provide a service and gain customers.
Even though the Department of Education would prefer private schools and universities to be saved in one form or another, sometimes the financial reality means that closing down the business and liquidating the company is really the only option on the table.
This will allow the institution to be closed in an orderly and efficient way with all assets being sold to benefit creditors.
Another advantage for an education based business to consider liquidation is that it will be conducted and managed by a licensed insolvency practitioner.
In a creditors voluntary liquidation (CVL), their role is to oversee the valuation and sale of assets at a fair price to repay creditors as far as possible. Crucially, they will also handle all creditors claims which could be useful if they include staff, students or parents.
Any liquidation process needs to be handled carefully as the business has to cease trading immediately and close in an orderly fashion but one involving children or older students worried about their future paths needs special care and attention given to both the procedure and the ongoing communication with creditors.
Liquidations can also include bounce back loan debt or CBILS lending too but an insolvency professional will be able to advise more specifically.
Every industry has had challenges to overcome during the year of lockdowns.
Some have been common to every business, some have been unique to the industry in question and education is no exception.
The experience of being a student has changed, possibly irrevocably, and this will have short and long term consequences - some temporary, some permanent and others that can’t be predicted yet.
The landscape has changed - probably for good and it provides every business in the education sector with new problems - but also solutions too.
No matter what your situation - one of the best moves you could make right now is to get in touch with us.
We offer governors, directors and business owners a free initial consultation where we can discuss your business in detail and help you plan your next steps - efficiently and effectively.
Now colleges and schools are being treated like any other business when it comes to insolvency, they can also use the advantages of the protections that some insolvency processes bring too - but only if they act while they have the time to do so.
Being taught a lesson is one thing, learning from one is always better.
The all-party parliamentary group (AAPG) on fair business banking rightly raises the point that business lending in the UK is unregulated, with no guaranteed protections from the Financial Conduct Authority (FCA) that personal borrowers would enjoy.
They would like to see the government introduce laws that could provide protection for small and medium sized businesses that borrow and give them some leverage in a court or a tribunal.
Kevin Hollinrake MP, Chair of the APPG, said: “The conversation is important now because of the huge amount of business debt just taken on during the Covid crisis.
“Some companies will inevitably default on their loans, triggering a chase by debt collectors. In many cases that will be done well and fairly but in other cases will be done not very well, and very unfairly.
“What we’ve learned from history is that we don’t learn from history. I could see this going wrong again.”
The FCA had to remind borrowers recently that the Recovery Loans Scheme, the replacement for the bounce back loan scheme that ended on March 31st 2021, was unregulated.
The APPG have proposed a series of “health warnings” on loan agreements since they believe that most small and medium sized businesses don’t understand the risks involved.
Only businesses with an annual turnover of £6.5 million or less have leave to appeal to the Financial Ombudsman Service if they believe they have been unfairly treated.
Some borrowers may have recourse to take their case to the relatively new Business Banking Resolution Service but this is a voluntary body with just seven lenders signed up and has itself been criticised for its eligibility criteria.
Without this legal protection, many businesses are instead relying on internal corporate policies and voluntary codes, neither of which hold much weight in a court of law.
Bounce back loan lenders have pledged to treat their customers fairly and may do their best to avoid triggering government guarantees while seeking to reclaim the owed amounts but the next few months will see them under increasing pressure from boards and shareholders to recover as much as possible.
Once the suspension of the use of winding up petitions and subsequent enforcement is lifted at the end of June, this will only increase the pressure for borrowers.
Chris Horner, insolvency director with Business Rescue Expert said: “Lenders will be keeping a close eye on bounce back loan repayments right now as the first installments become due for millions of borrowers.
“Yes, the loans were guaranteed by the government but this is a last resort for the lenders rather than a first resort.
“They will have to show that they’ve exhausted every avenue of recouping the funds available to them including legal measures.
“If you’ve borrowed under the bounce back loan scheme and either know for definite or are pretty sure that you’ll be unable to make your first repayments then you should get some professional advice before your lender gets in touch - which they soon will.
“These companies may have options available to them, including closing down, but they have to act right now.”
Nobody sensible sets off on a journey without a final destination in mind or directions on how to get there so why do so many businesses with financial challenges try to save themselves without them?
Business Rescue Expert offers a free initial consultation to any business owner or director that has questions about their company’s future direction or indeed it’s future full stop.
We’ll go through all the issues facing you and give you some realistic and timely solutions that you can begin to implement straight away.
If your circumstances change then so can the rescue plan but we’ll always be on hand to help, no matter where you ultimately want to be.
When we published the first part of our series looking at the UK’s bounce back loan scheme earlier this month, it was to get a better view of the overall borrowing levels.
We found several official projections indicating that billions of pounds lent under the scheme would ultimately not be repaid, with the losses equal to the cost of building between six and 23 Wembley Stadiums from new.
For this final article in the series - we’re looking on a more local basis.
Which nations and regions saw the most demand for bounce back loans? Which areas had the most borrowing per capita and which parliamentary constituencies had the highest bounce back loan borrowing rates?
The data sources used to compile the various best and worst-case scenarios used in the projections are taken from the Office of Budget Responsibility’s Fiscal Sustainability Report; the latest BEIS annual report and the National Audit Office (NAO)’s regularly updated COVID-19 cost tracker.
The UK regional and parliamentary constituency lending breakdowns were compiled and published by the British Business Bank.
The number of businesses in each region was taken from the Department of Business, Energy and Industrial Strategy’s business population estimates.
Using this public data as our benchmark, we projected three different scenarios for bounce back loan scheme defaults as outlined within them.
The scenarios set out a best case (with a 15% bounce back loan default rate); a median case (40% default rate) and a worst case scenario (60% default rate).
Finally, the regional classifications used are the official Classification Of Workplace Zones (COWZ) administered by the Office of National Statistics
When talking about millions and billions of pounds, It can be easy to lose sight of what these figures mean for individual businesses.
Taking out a bounce back loan might have been the difference between closing down and remaining open at the time for many of the small and medium-sized businesses that are ultimately the bedrock of the UK economy.
We’ve collated the total amount each devolved nation and English region has collectively borrowed under the bounce back loan scheme as well as the overall number of bounce back loans taken out by businesses based in that area.
We also list the average amount borrowed by these companies individually, the ratio of businesses to loans in that area and the projections for default rates, based on our analysis:
While bounce back loans were supplied by banks and other lending institutions, because the funding was guaranteed, the amount lent was limited to between a minimum of £2,000 to a maximum of whichever was lower - £50,000 or 25% of the applicant’s 2019 turnover.
As might be expected then, the areas with both the highest number of bounce back loans taken out and the highest total amount of borrowing were London, closely followed by the South East of England.
But if we look at the ratio of local borrowing - which is the total number of BBLS loans approved for that location divided by the total number of businesses operating in an area - then the picture changes.
For instance, 27.5% of businesses in the North East, over one in four, applied for finance under the bounce back loan scheme, which was the highest demand in the country. But the average amount actually loaned per applicant was £26,751 - the lowest figure in the UK.
That’s nearly £7,000 less than a comparable London-based business that borrowed an average BBLS amount of £33,480, the highest average amount in the country.
27% of North West businesses applied for support funding, which were given £29,568 on average (nearly £3,000 more than their North East counterparts) while Welsh companies were the next most eager. 26.4% of businesses based in Wales took out bounce back loan borrowing to an average sum of £27,226 each.
Businesses in South West England had the lowest overall borrowing ratio with just over one in five (20.6%) applying to the scheme and taking £28,432 in bounce back loan lending support.
Businesses on the other side of the Irish Sea from the UK mainland in Northern Ireland saw the lowest overall number of bounce back loans taken out with just over 38,000 approved - nearly eight times less than the amount applied for by London based companies.
Northern Ireland also saw the least amount of total borrowing too with £1.1 billion lent, although even this total could be subject to defaults in the range of £165 to £660 million depending on the ultimate level of defaults occurring.
We’ve taken a deeper dive into the available data and analysed bounce back loan scheme lending according to the makeup of each of the UK’s 650 parliamentary constituencies.
Regional and national data gives us a good understanding but we can see how the story looks even closer to the ground with this additional information.
The table below shows the top five constituencies for the total number of bounce back loans taken out by companies physically located in the area.
It also shows the total amount they borrowed, the average amount borrowed by businesses located there, the projected default rates and who the sitting MP is.
This is who businesses might be contacting in future for help if their fortunes take a turn for the worse in the intervening weeks and months.
Once again, London based companies dominate these results
The City of London and Westminster constituency includes some of the most prominent and pricy real estate in the world including Pimlico, Hyde Park and most of Covent Garden.
Businesses here dominate both the number of bounce back loans taken out (16,122) and the highest aggregate amount borrowed under BBLS at well over half a billion pounds (£633,881,829).
Some of the other areas in the top five might be more surprising.
The neighbouring constituency to Westminster is Holborn and St Pancras, represented by Labour leader Sir Keir Starmer. This has the second-highest number of businesses taking out bounce back loans, borrowing a total of over £354 million, of which at least £53 million could be lost if just 15% of these borrowers default in the coming months.
Hackney South and Shoreditch, most commonly associated with technology startups and the hipster coffee hangouts, were the next most eager to borrow with over 9,000 bounce back loans obtained, which provided over £300 million in support collectively for the app builders and small artisan brewers in this quarter of the city.
The top five constituencies outside of London represent some of the other city centre areas of Birmingham, Manchester, Glasgow and Liverpool, along with a more surprising entry - Slough.
Most famous as a commuter town at the southern edge of the Thames Valley and the fictional headquarters of Wernham Hogg paper as seen in the titles of The Office, Slough is also one of the largest mixed commercial estates in Europe combining a number of large manufacturers and corporate headquarters which will attract other companies wanting to be located closer.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “The data gives a fascinating insight into the distribution of bounce back loan borrowing across the whole of the country.
“It’s especially interesting when you look at which areas have seen the most businesses borrowing and the amounts they have loaned.
“Based on the insolvency cases of the small businesses we’ve worked with this year, over 41% of them entered liquidation with an outstanding bounce back loan balance of £37,350 - higher than the individual borrowing averages of any location.
“No matter where a business is based, the important thing for them to remember is that they do have options if they’ve taken out a bounce back loan and think they’ll have trouble repaying it.
“By getting professional insolvency advice quickly, possibly before any potential problems appear, they will be in the best position to react and respond.
“After nearly two years of consistent decline, company insolvency figures are starting to rise once more and as support measures are removed later in the year, we’d only expect this trend to gather pace.
“It won’t happen at a uniform rate across the country, it will affect some areas more quickly and deeply than others.
The government has announced a new bill that will allow HMRC and The Insolvency Service to go after directors who dissolved their companies improperly leaving outstanding debts, including bounce back loans or tax.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will allow retrospective investigation and action to be taken against directors and can lead to disqualification and personal liability if they are found to have dissolved their company with outstanding debts.
For the first time, authorities will have the power to investigate company dissolutions and strike offs retrospectively to make sure they were completed properly.
The Business Secretary Kwasi Kwarteng said: “We need to restore business confidence and people’s confidence in business.
“This is why we won’t hesitate to disqualify directors who deliberately leave employees and the taxpayer out of pocket.
“We are determined that the UK should be the best place in the world to do business. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”
The sanctions include fines and a disqualification of up to 15 years from being a company director.
First announced in the Budget earlier this year, the measures will be introduced in parliament soon before passing into law.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “Dissolving or closing down a company is the natural endpoint of the business life cycle and can finally occur for many reasons.
“Directors who thought it would be an easy way to avoid repaying bounce back loans or other debts should now be rightly concerned because for the first time, The Insolvency Service and HMRC will be able to investigate the circumstances of their dissolution to make sure it was completed properly.
“Directors who liquidated their business properly have nothing to worry about - it’s those that tried to sneak their dissolutions under the wire that will be anxiously reading the headlines.
“There were over 415,000 company dissolutions in 2020 alone, so there are a lot of potential cases to be investigated almost immediately.
“It will also force directors planning to close down to look at their liquidation options more closely as the proper method to end their business rather than taking their chances with a risky dissolution.
“These measures will ultimately create a fairer, more level playing field and will also be better for the treasury as we expect tax receipts to be higher and more outstanding bounce back loans to be recouped as a result.
“They might have other options available to them but if they are determined to close down then we can let them know the right way to do it from the start.
“We’re also happy to talk to any director that’s nervous about any consequences of their dissolution although the majority will have nothing to worry about.”
We found several official projections indicating that billions of pounds lent under the scheme would ultimately not be repaid, with the losses equal to the cost of building between 6 and 23 Wembley Stadiums from new.
In this blog, we’ll be focusing more closely on how small businesses in their individual industry sectors have embraced the scheme - how much has been borrowed, by whom and what the recipients have done with the funds.
The data sources used to compile the various best and worst-case scenarios used in the projections are taken from the Office of Budget Responsibility’s Fiscal Sustainability Report; the latest BEIS annual report and the National Audit Office (NAO)’s regularly updated COVID-19 cost tracker.
The industry lending breakdowns were compiled and published by the British Business Bank.
Using this public data as our benchmark, we projected three different scenarios for defaults as outlined within them.
The scenarios set out a best-case (with a 15% BBL default rate); a median case (40% default rate) and a worst-case scenario (60% default rate).
We’ve taken a look at the total amount each sector has collectively borrowed under the bounce back loan scheme, the overall number of loans taken out, the average amount borrowed by a company in that sector and the default projections based on our analysis.
We can see that retail businesses - which include high street shops, shopping mall tenants and independent stores - borrowed a collective £7.7 billion which is higher than any other comparable sector. Not unexpected as non-essential retail stores have only been allowed to reopen in the past week so have had less opportunity to trade offline, if they’ve traded at all.
If businesses in this sector fail at the rate officially expected then we can see bounce back loan default losses ranging from £1.16 billion up to a high estimate of £4.6 billion.
Builders, fitters and other construction industry businesses are the next highest borrowing sector obtaining a collective £7 billion through the BBLS although this sector also saw the most individual loans taken out with over 238,000 bounce back loans being supplied to the various businesses.
The professional sector which also includes scientific and technical activities had the next largest borrowing requirement with a collective £4.5 billion lent to it and also saw the second-largest amount of individual bounce back loans granted with nearly 160,000 being granted.
Three sectors stand out above the rest when it comes to how much each individual business has borrowed on average.
Shops and stores in the retail sector had the highest individual average figure with £35,530 borrowed.
It’s hoped that April’s grand reopening and expected uptake in sales will help retailers be more successful in 2021 and insulate them from the negative effects when economic support measures are withdrawn later in the year.
This was followed by the restaurants, hotels, cafes, pubs and bars that make up the hospitality sector. It’s arguable that these businesses have had the toughest 12 months under coronavirus trading restrictions so it’s no surprise that their average individual borrowing is as high as £35,503.
The third highest might be more surprising as it’s real estate companies. They borrowed an average of £35,080 per loan and while a large amount of their trade has moved online - a lot still has to be done in person whether it’s viewing properties, meeting agents to sign witnessed documents, financial and legal issues or being present but socially distanced when an agent conducts a tour of their property.
At the other end of the borrowing scale, businesses in the education sector borrowed the least on average with £23,238 per loan granted.
The next lowest were Arts and Entertainment companies borrowing £24,906 each and Transportation businesses borrowing £25,667 per loan.
As the original and any topped-up bounce back loans start to come due for payment, we’ll have some idea in the coming weeks and months which sectors are best able to start paying off their support and which are still struggling to avoid liquidation.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “The bounce back loans and other government backed support schemes have seen an unprecedented demand and take-up from small businesses, who may have had no other recourse to commercial finance.
“The early signs we are seeing in our own figures for small-company liquidations so far in 2021 are that already over 41% of companies entering liquidation have bounce back loans with an average balance outstanding of £37,350.
“We expected that the worst affected sectors such as retail, hospitality and construction would have had the most need for these funds and they will be the ones hoping for the quickest turnaround in fortunes now they can begin reopening and trading again.
“But there are no guarantees of success or even survival for any business right now.
“We’ve seen the corporate insolvency numbers start to rise again after being at historic lows and once support measures are withdrawn we can predict that they will rise even more as a result.
“As the economy opens up, there is light at the end of the tunnel for those businesses in difficulty that have utilised bounce back loans.
"The coming months liquidation figures are likely to give the clearest indication yet as to just how well small businesses will recover.
“No matter which sector a business operates in, they have options if they’ve taken out a bounce back loan and think they’ll have trouble repaying it
“By getting professional insolvency advice quickly, possibly before any potential problems appear, they will be in the best position to react and respond."
The Bounce Back Loan Scheme (BBLS), launched last year to help support businesses adversely affected by the Covid-19 lockdown period, finally closed to new applications and top-up requests on March 31st.
Designed to allow SME businesses to quickly access funds, they allowed borrowers to obtain between £2,000 and up to 25% of their annual turnover capped at a maximum of £50,000.
These figures also include BBLS loans which have subsequently been “topped-up” up to a maximum of £50,000. An additional 101,666 of these top-ups had been approved by lenders worth approx. £0.91 billion of the total.
Never before have such generous commercial loan terms been available. Borrowers applied for the loan through accredited lenders, many of whom temporarily lowered their own lending criteria because the loan risk was 100% guaranteed by the government.
This meant that the loan could be given on an unsecured basis without the need for additional security over property or assets, debentures or personal guarantees from company directors.
The Bounce Back Loan was interest and fee free for the first 12 months with the interest rate capped at 2.5% annually afterwards. The initial length of the BBLS is six years but can be repaid early without penalty.
Borrowers also had the option to extend the repayment term to ten years; pause repayments once for a period of six months or move to an interest-only repayment period of six months on no more than three occasions throughout the life of the loan.
As the scheme has now closed to new entrants and the first repayments are coming due, we look at what this means for businesses still in financial difficulties that won’t be able to make the repayments as agreed or planned.
We’ve looked at repayment projections from various official data sources all of which argue that a significant portion of the BBLS lent out will ultimately not be repaid and will have to be written off.
The first is the Office of Budget Responsibility’s Fiscal Sustainability Report which estimates that some 40% of all BBLS borrowers would default on their loan agreements.
The second is from the BEIS - the Department for Business, Energy and Industrial Strategy - annual report which projects estimated BBLS defaults would be in the range of 35-60%.
More data is taken from the Covid-19 cost tracker from the National Audit Office (NAO).
This latest estimate predicts that up to £5 billion will ultimately be written off collectively across the three main loan schemes including BBLS.
Using these predictions as benchmarks, we envisaged three different scenarios that could play out.
These are for a best case (with a 15% BBLS default rate); a median case (40% default rate) and a worst case scenario (60% default rate).
The results are striking:
Original Source: HM Treasury coronavirus (COVID-19) business loan scheme statistics, accessed 25 March 2021.
To better illustrate the size of the sums estimated to be written off, we compared them to the most expensive building ever built in the UK - the new Wembley Stadium.
Adjusted for inflation it cost a modern equivalent of £1.2 billion to build.
The number in the final column shows how many Wembleys could be built for the money that is expected to be written off.
Even in the best case scenario, nearly a quarter of a million loans aren’t going to be repaid. This is a loss of £6.9 billion to the UK Treasury or the equivalent of six Wembleys.
In the median case, this rises to £18.6 billion and over half a million loans defaulted on which sees the number of theoretical stadiums bought rise to 16.
If the worst case scenario came to pass, then close to a million loans would be defaulted which would see £27.9 billion not be repaid - or the price of building Wembley again 23 more times.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “The figures illustrate not only the size of the support measures that were available to businesses to borrow during the pandemic lockdown but also the potential cost if they can’t be repaid.
“In the first quarter of this year alone, over 42% of the liquidation cases we’ve handled had taken out a BBLS, and the average amount borrowed averaged £37,500 per company.
“As the first loan payments for the BBLS come due, businesses will have to seriously look at their ability to pay and their calculations might have been affected by not being able to reopen earlier than this month at best.
“Businesses that have topped-up their initial BBLS loan will also find out that not only are they unable to defer these payments, but they’ll come out at the same time as their original loan repayments - an unwelcome and expensive surprise.
“The most important thing we can is to remind business owners and directors that there are options available for them.
“If they get professional advice and quickly then they could yet find a way out of a seemingly impossibly tight situation. Ignoring it is only guaranteed to add to their problems.”
We have written extensively about Bounce Back Loans and how businesses in financial difficulties can navigate their way through the increasingly difficult situations many are finding themselves in - all before many of them can reopen their doors to the public again.
No matter how bad the situation looks initially, most businesses have more options than they think, but the only way to know for sure what they are is to get in touch with us to arrange a free initial consultation.
Liquidation is always a valid option but it might not be the most appropriate one straight away - it all depends on various other factors and what the business owners and directors ultimately want to do.
Get some professional advice then choose what decisions have to be made - while they’re still your decisions to make.