As recession looms, UK business sends out SOS credit

  • Credit more expensive, on tighter terms, as banks weigh risks
  • Some business owners use their own money to fill gaps
  • The funding crisis could deal a new economic blow to Britain

LONDON, Nov 17 (Reuters) – With inflation rocketing and the recession looming, many British companies are struggling to find affordable bank financing, putting pressure on an embattled UK government which is presenting a budget to revitalize the economy.

British fruit grower Hall Hunter is one of thousands of businesses in the UK under pressure, forcing owner Harry Hall to consider the drastic move of lending to his own successful business to top up his expensive bank loans.

“I’ll probably be the bank,” said Hall, who can’t secure a loan product from his bank to offset his high borrowing costs. He told Reuters he would likely put some of his personal wealth into his business to protect it from inflation rates of 11.1% and a recession that could last up to two years.

According to data from Reuters and interviews with lenders and business leaders, banks are increasingly nervous about lending to small businesses as rising debt, labor and commodity costs put the business case of lending to such businesses under unprecedented strain.

Lenders expect the supply of credit to the smallest businesses with annual sales of less than £1million to fall 10.9% in the last three months of this year, a Bank of England (BoE) survey released last month showed .

This could spell trouble for incoming Prime Minister Rishi Sunak and Treasury Secretary Jeremy Hunt when they announce a new, tough fiscal policy on Thursday to stabilize the economy after their short-lived predecessors unleashed chaos in financial markets with plans for unfunded tax cuts.

Any crisis for UK small businesses, which often lack the scale to pass on cost increases to customers as easily as larger competitors, could deal a new economic blow.

Such companies account for 48% of private sector employment and about £1.6 trillion, or 36% of turnover, according to the Federation of Small Businesses (FSB), citing government data that defines small businesses with up to 49 employees.

FSB Chairman Martin McTague told Reuters he met Sunak and Hunt last Friday to call for new tax support for small businesses, including relief on asset sales and research and development tax credits.

“How do we get out of this hole if it’s not small businesses? The sectors that have been hit hardest by the pandemic are finding it very difficult to try to get banks to support them,” he said.


Banks are still lending, but the risks and higher relative costs involved in financing the smallest businesses, many of which may not survive, mean they often have no choice but to turn them down, four senior sources said the banking industry.

Stephen Pegge, head of commercial finance at banking lobby group UK Finance, pointed to evidence of small and medium-sized enterprises (SMEs) securing credit more broadly – banks lent £6.5bn to companies with less than £25m turnover in September , BoE data indicates.

“Lending is definitely going on,” Pegge added. “But there’s no question that small businesses now have less capacity to increase their borrowing because the economy is slowing.”

In fact, small businesses in the UK see their access to credit at their worst level since 2015, according to a quarterly FSB survey of 1,383 small business owners.

42% of financing requests failed in the third quarter, up from 39% in the second quarter of the year, the survey found, while one in five companies seeking financing received loan offers at rates above 11%. .

Many small businesses are also yet to repay government-backed loans they were granted to prop them up during the COVID lockdowns, making their credit profiles increasingly unattractive. Only £4.7 billion of the £46 billion lent to small businesses under the ‘Bounce Back Loan’ scheme had been repaid in full, according to the government’s latest data on July 31.

“Business owners need to look at alternative options, one of which is to reach into their own pockets,” said Claire Burden, partner in advisory services at Evelyn Partners.

Others, like Douglas Grant, CEO of Manx Financial Group, called for a permanent government-backed loan program to protect SMEs, saying it could be the “fundamental difference between success and failure for many businesses and, in turn, for our economy”.


Naresh Aggarwal, deputy director for policy at the Association of Corporate Treasurers, which represents corporate finance staff, said banks are taking a pragmatic approach to lending as the economy falters to avoid costly writedowns.

Credit is still being made and companies that breach covenants related to their debt are offered a waiver, but the support comes at a price.

“The lenders are increasing the margin on the loan,” he added. “And for most companies, they don’t have a choice. It’s not exploitation, it’s a risk premium,” Aggarwal said.

Large banks have already set aside hundreds of millions of pounds in additional cash to cover potential losses.

Lloyds, which provided the most detailed breakdown for the July-September quarter, reported a 30% increase in the worst category of problem loans in its small business unit compared to the end of 2021, suggesting why banks may be treading cautiously.

Companies of all sizes are already increasingly collapsing under the strain. The number of quarterly business bankruptcies in England and Wales from April to June hit the highest level in almost 13 years, official data showed last month.

Small businesses face the greatest threat; According to a survey of 1,930 companies conducted by commercial bank Tide in September, one in four has considered closing due to rising cost pressures.

“Companies are finding it difficult to prove that they are still sound businesses,” said Richard Burge, CEO of the London Chamber of Commerce and Industry. “But they will only be healthy if they can access the credit 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.


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