Focus: As recession looms, British business sends out lending SOS
17/11/2022 06:00
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Credit more costly, on tighter terms as banks weigh risks
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Some business owners using own money to bridge gaps
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Funding crunch may deliver new economic blow to Britain
By Sinead Cruise, Iain Withers and Lawrence White
LONDON, Nov 17 (Reuters) - As inflation rockets and
recession looms, many British businesses are struggling to
secure affordable bank finance, piling pressure on the embattled
UK government as it unveils a budget aimed at reviving the
economy.
British fruit-grower Hall Hunter is one of thousands of
businesses in Britain feeling the squeeze, forcing owner Harry
Hall to consider the drastic step of lending to his own
successful company to top up its expensive bank lending.
"I'm probably going to 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 companies, according to data compiled by Reuters and
interviews with lenders and business heads, as rising costs of
debt, labour and raw materials put the business case of lending
to such companies under unprecedented strain.
Lenders expect the supply of credit to the smallest firms,
with annual turnover of under 1 million pounds, to fall by 10.9%
in the last three months of this year, a Bank of England (BoE)
survey published last month showed.
This could spell trouble for new Prime Minister Rishi Sunak
and finance minister Jeremy Hunt as they announce a new, austere
financial blueprint on Thursday, seeking to stabilise the
economy after their short-lived predecessors unleashed chaos in
financial markets with plans for unfunded tax cuts.
Any crunch for Britain's small businesses, which often lack
the scale to pass on cost rises to customers as easily as bigger
rivals, could deliver a new economic body blow.
Such companies account for 48% of private sector employment
and about 1.6 trillion pounds, or 36%, of turnover, according to
the Federation of Small Businesses (FSB), citing government data
that defines small firms as having up to 49 staff.
FSB Chair Martin McTague told Reuters he met Sunak and Hunt
last Friday to demand fresh fiscal support for small businesses,
including relief on asset sales and tax credits on research and
development.
"How are we going to get out of this hole if it's not small
businesses? Those sectors that have been hardest-hit by the
pandemic, are finding it very difficult to try and get the banks
to provide them with support," he said.
'MAKE OR BREAK' FOR ECONOMY
Banks are still lending, but the risks and higher relative
costs associated with funding the smallest businesses, many of
which may not survive, means they often have no choice but to
turn them away, four senior banking industry sources said.
Stephen Pegge, head of commercial finance at bank lobby
group UK Finance, pointed to evidence that small and medium
enterprises (SMEs) more broadly were securing credit - banks
lent 6.5 billion pounds to companies with less than 25 million
pounds turnover in September, BoE data shows.
"Lending is definitely flowing," Pegge added. "But there's
no question that small businesses now have less capacity to
increase their borrowing because you've got a slowing economy."
Indeed small companies in Britain see their access to credit
at its worst level since 2015, according to a quarterly survey
by the FSB of 1,383 small business owners.
Forty-two percent of applications for funding in the third
quarter failed, up from 39% in the second quarter of the year,
the survey found, while one-in-five firms seeking finance were
quoted loan offers at interest rates higher than 11%.
Many small companies have also yet to repay state-backed
loans extended to prop them up during COVID lockdowns, making
their credit profiles increasingly unattractive. Only 4.7
billion pounds from the 46 billion lent to small businesses
under the "Bounce Back Loan" scheme had been fully repaid as of
the latest July 31 data from the government.
"Business owners are having to look at alternative options,
one of which is to dip into their own pockets," said Claire
Burden, partner for advisory consulting at Evelyn Partners.
Others like Douglas Grant, CEO of Manx Financial Group,
called for a permanent state-backed loan scheme to protect SMEs,
saying this could act as the "fundamental difference between
make or break for many companies and, in turn, our economy".
BANKS 'DON'T HAVE A CHOICE'
Naresh Aggarwal, associate director of policy at the
Association of Corporate Treasurers, which represents business
finance staff, said banks were taking a pragmatic approach to
lending as the economy falters to avoid costly writedowns.
Loans are still being issued and firms in breach of
covenants linked to their debts are being offered waivers but
support is coming at a price.
"Lenders are increasing the margin on the loan," he added.
"And for most corporates, they don't have a choice. It's not
exploitative, it is 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-September quarter, disclosed a 30% jump in the most severe
category of problem loans in its small business unit compared to
the end of 2021, hinting at why banks may tread carefully.
Companies of all sizes are already buckling under the strain
in greater numbers. The number of quarterly company insolvencies
in England and Wales hit its highest level in nearly 13 years in
April-June, official data last month showed.
Small businesses face the biggest threat; one in four have
considered closing down as a result of rising cost pressures,
according to a survey of 1,930 firms conducted by business bank
Tide in September.
"Businesses are finding it hard to demonstrate they are
still sound businesses," said Richard Burge, CEO of the London
Chamber of Commerce and Industry. "But they're only going to be
sound if they can get access to the loans they need."
($1 = 0.9843 euros)
(Reporting By Lawrence White, Sinead Cruise and Iain Withers;
Editing by Pravin Char)
((lawrence.white@thomsonreuters.com; +44 20 7513 5083; Reuters
Messaging: @ReutersLawrence))