LONDON, Nov 17 (Reuters) – As inflation soars and recession looms, many British companies are struggling to secure affordable bank finance, increasing pressure on the UK government as it presents a budget aimed at reactivate the economy.
British fruit grower Hall Hunter is one of thousands of UK businesses under pressure, forcing owner Harry Hall to consider the drastic step of borrowing from his own successful company to meet his costly borrowing banking
“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 inject some of his personal wealth into his business to insulate it from inflation rates of 11.1% and a recession that could last up to two years.
Banks are increasingly nervous about extending credit to small businesses, according to data compiled by Reuters and interviews with lenders and business leaders, as rising costs of debt, labor and raw materials put the business case for loans to these companies under unprecedented stress.
Lenders expect the supply of credit to smaller businesses, with an annual turnover of less than £1m, to fall by 10.9% in the final three months of this year, a Bank of England survey showed England (BoE) published last month.
That could spell trouble for new Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt as they announce an austere new financial plan on Thursday, which aims to stabilize the economy after their short-lived predecessors unleashed chaos on financial markets with unfunded tax cut plans.
Any crisis for Britain’s small businesses, which often lack the scale to pass on cost increases to customers as easily as larger rivals, could deal another economic blow.
These businesses account for 48% of private sector employment and around £1.6tn, or 36%, of turnover, according to the Federation of Small Businesses (FSB), citing government data which defines small businesses as to which they have up to 49 workers.
FSB chairman Martin McTague told Reuters he met Sunak and Hunt last Friday to push for new tax support for small businesses, including relief from asset sales and tax credits to research and development.
“How are we going to get out of this hole if it’s not small businesses? Those sectors that have been most affected by the pandemic, they have a lot of difficulty trying to get banks to support them,” he said.
‘MAKE OR BREAK’ FOR ECONOMY
Banks are still lending, but the higher relative costs and risks associated with financing smaller companies, many of which may not survive, mean they often have no choice but to turn them down, four senior sources said of the banking sector.
Stephen Pegge, head of commercial finance at banking lobby group UK Finance, pointed to evidence that small and medium-sized businesses (SMEs) were generally securing credit: banks lent £6.5bn to businesses with less than £25m of turnover pounds in September, BoE data. shows.
“Lending is definitely flowing,” Pegge added. “But there’s no doubt that small businesses now have less ability to increase their lending because you have a slowing economy.”
In fact, UK small businesses are seeing their access to credit at their worst level since 2015, according to a quarterly FSB survey of 1,383 small business owners.
42% of funding applications in the third quarter failed, up 39% from the second quarter of the year, the survey found, while one in five businesses seeking funding received loan offers in interest rates higher than 11%. .
Many small businesses are also having to repay state-backed loans granted to support them during the COVID lockdowns, making their credit profiles increasingly unattractive. Only £4.7bn of the £46bn lent to small businesses under the ‘recovery loan’ scheme had been repaid in full as of the latest government figures on 31 July.
“Business owners need to look for alternative options, one of which is dipping into their pockets,” said Claire Burden, advisory consulting partner at Evelyn Partners.
Others such as Douglas Grant, chief executive of Manx Financial Group, called for a permanent state-backed lending scheme to protect SMEs, saying it could act as the “fundamental difference between make or break for many businesses and in turn , our economy”.
BANKS “DO NOT HAVE A CHOICE”
Naresh Aggarwal, associate director of policy at the Association of Corporate Treasurers, which represents corporate finance staff, said banks were taking a pragmatic approach to lending as the economy falters to avoid costly write-downs.
Loans are still being made and companies that default on their debt covenants are being offered waivers, but the support comes at a price.
“Lenders are increasing the loan margin,” he added. “And for most companies, they have no choice. It’s not exploitative, it’s a risk premium,” Aggarwal said.
Major banks have already set aside hundreds of millions of pounds of extra cash to cover potential losses.
Lloyds, which provided the most detailed breakdown for the July to September quarter, revealed a 30% jump in the most serious category of problem loans in its small business unit compared to the end of 2021, hinting at that banks can act carefully.
Businesses of all sizes are already buckling under the strain in greater numbers. The number of quarterly business insolvencies in England and Wales hit their highest level in almost 13 years between April and June, according to official figures last month.
Small businesses face the biggest threat; one in four have considered closing as a result of rising cost pressures, according to a survey of 1,930 businesses by business bank Tide in September.
“Companies are finding it hard to show that they are still strong businesses,” said Richard Burge, chief executive of the London Chamber of Commerce and Industry. “But they will only be strong if they can access the loans they need.”
($1 = 0.9843 euros)
Reporting by Lawrence White, Sinead Cruise and Iain Withers; Editing by Pravin Char
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