Borrowing money

Mid-sized European companies mostly weathered the COVID-19 storm

Although the latest COVID-19 restrictions have all but been lifted, their effect marks the landscape of UK SMEs as we pass the second anniversary of the start of the pandemic.

At the height of the restrictions, many companies were forced to completely rethink their business models. Employees were sent to work from home and practices were migrated to operate online when possible and when that was not possible businesses had to shut down. For some it was the last time.

SMEs represent 50% of the total income generated by UK businesses and 44% of the working population. SME turnover growth is estimated to have fallen by 30% on average in 2020, with the turnover rate remaining low but recovering slightly in December 2020.

According to the Bank of England’s Impacts of the COVID-19 Crisis Staff working paper, 44% of small businesses had to cut jobs and GDP was at an all-time low, falling 10% between 2019 and 2020. making it the largest annual fall in 300 years.

Despite this, according to Goldman Sachs99% of businesses are expected to survive, assuming no further national lockdowns due to rapid response, adapting to online practices and government support.

Government support key to recovery

The government has played a fundamental role in this recovery, introducing multiple loan programs to help fill the revenue gap for SMEs. In 2020, £70bn of the £80bn of new funding raised by companies came from these schemes.

the Bounce Back Loan Scheme (BBLS) was one of the most popular, with a 100% risk guarantee and no refunds for the first 12 months. The government has issued 1.5 million BBLS loans worth up to £50,000. The Coronavirus Business Interruption Loan Scheme (CBILS) offered similar terms for loans of up to £5m with 80% guaranteed by the government.

Moreover, the Recovery Loan Program (RLS) was introduced, offering loans to businesses of all sizes of up to £10m with 80% government backing, a scheme still available to SMEs.

During the pandemic, 67% of SMEs have taken out external financing such as these loans, with 80% saying that the current support is sufficient to ensure the survival of their business. More … than four out of five said they believe their business has the ability to grow from the COVID19 grants.

Ravi Anand, Managing Director of ThinCats
Ravi Anand, Managing Director of ThinCats.

The future looks bright given these numbers, and the pandemic recovery is well underway.

According to Ravi Anand, Managing Director of ThinCats, we are not out of the woods yet.

More resilient Midimarket SMEs

“The number of small SMEs that have borrowed using the programs is about six times what they usually borrow. When we look to the middle market, it’s only about twice that,” Anand said.

“What does that tell us? It indicates that mid-market SMEs are more resilient, more robust and have more levers to pull. »

ThinCats is an alternative lender focused on medium-sized SMEs. They said they lent more than usual during the pandemic, but found that their customers had grown.

“When we look at net cash after borrowing balance sheets, net mid-market cash has increased by 60%. Small SMEs are relatively stable (at 5%). Small SMEs therefore borrowed a lot of money to stay immobile in net cash,” Anand said.

The company issued various CBILS to its clients, all of which were in excess of £1m and averaged £3m.

“(Our borrowers) borrowed a bit more than they normally would, but not in a way that was detrimental to them coming out of the pandemic,” Anand said.

Delayed effects on the SME sector

“What happened in the small segment of the market, especially with BBLS…a lot of people were borrowing money, way beyond what they would normally take,” Anand said.

“There has been a lot of fraud, which we haven’t seen yet, but it has also allowed companies that would naturally become insolvent to continue. So insolvency is at an all-time low no matter which market you look at”

According to Anand, while loan programs offered by the government during the pandemic have been effective in keeping businesses going, they have created a bubble waiting to burst.

“There will be a massive catch-up over the next two or three years. And because small SMEs have borrowed a lot more, the catch-up will be more severe.

Chart showing insolvency levels

In July 2021, insolvency was reported by the HM Insolvency Service to be 13% higher than July 2020. It was 24% lower than two years earlier.

Fast forward to February 2022, and the chart shows a different story, with insolvency 13% higher than February 2020, total business insolvencies at a similar level to pre-pandemic and voluntary liquidations of creditors at a record level compared to three years before.

Due to higher borrowing levels, these levels could continue to soar.

A pandemic of fraud

As we move away from the initial market shock created by the pandemic, government programs are slowly being halted and business is trying to return to normal.

With this change, more and more reports of fraudulent activity regarding government loans, especially the BBLS, are coming to light.

Graph showing the gross number of loans

“We don’t know the exact numbers, but market commentators say 25-30% of bounces are fraudulent,” Anand commented.

“So there were different cases of fraud, borrowers borrowing money and then making the business insolvent and removing the withdrawal, borrowers setting up ten businesses and borrowing £50,000 per business. There are all sorts of frauds that have happened that will also increase insolvency.

On March 15, 2022, the FinancialTimes reported that official estimates suggest between £3.3 billion and £5 billion could be lost to fraud. Banks under the BBLS have lent more than £46bn with only minimal checks carried out.

The British Business Bank, which oversaw the program for the government, identified 22,000 loans that appeared to be duplicates and expects that number to rise.

“A lot of noise” but moderate impact

“Medium-sized SMEs are not only stronger because of diets. They have also become more efficient. People have integrated technology into their businesses…they are in a great position to go out and take advantage of the opportunities and weather the storm somewhat.

About 25% of the national GDP contribution is from small businesses, 25% from medium-sized businesses and 50% from large businesses. Ninety per cent of BBLS went to micro businesses, worth £39.7bn, indicating the effects of the BBLS bubble are likely to be concentrated in the small business sector .

This differs from the global economic crisis of 2009, the most recent period of significant economic decline.

The crisis has seen mid-sized companies bear the brunt of reduced available cash during this period, limiting their ability to continue borrowing at the same rate, and insolvency has increased by 1.5%, driving down the GDP and a massive wave of closures.

In this 2009 table, only 2% of small businesses borrowed from banks, compared to 35% in 2020 and 2021.

Many of these companies were so small and their borrowings so insignificant that many were not recorded in official insolvency statistics.

“The thing about small micro-enterprises is that they can phoenix. If you go bankrupt because you are an individual entrepreneur, you can start over on another basis. Thus, the rate of change for micro-SMEs will still occur and the impact on GDP is slightly more moderate. Anand said.

“There will be a lot of noise, absolutely, but the real impact has mitigators.”