Many companies that took out emergency loans during the COVID-19 pandemic are now at risk of collapse because of those same loans, the Bank of England has warned.
Companies across the UK that before COVID-19 would have been turned down for loans were able to tap into government-backed schemes during pandemic times.
Now, many of these are facing loan bills that they might be unable to pay off.
On Friday, the Bank of England warned that higher borrowing during the pandemic has likely put more businesses at risk.
“The increase in debt—though moderate in aggregate—has likely led to increases in the number and scale of more vulnerable businesses,” it said.
“As the economy recovers and government support, including restrictions on winding up orders, falls away, business insolvencies are expected to increase from historically low levels,” it added.
Around 1.7 million companies borrowed money under three emergency loan schemes that were launched last year.
Many of them were tiny companies that had not borrowed before, and desperately indeed money to stave off immediate collapse.
Though the terms of the loans are generous—the interest on Bounce Back Loans, which were the most common, is only 2.5 percent—the businesses still have to pay back their banks.
They have up to 10 years to do so and can request several periods of lower payments.
The proportion of small- and medium-sized firms that see 15 percent or more of the money that comes in through the door go straight out to cover debt payments has increased sixfold since before the pandemic, the Bank said.
Before COVID-19, 3 percent of companies reported paying 15 percent of their inflows, now that has risen to 18 percent.
In its financial stability report, the Bank of England also said that the outlook for the economy is still “uncertain.”
Recently the pace of recovery from the pandemic has slowed, and pressures from inflation have risen.
Many companies have reported increases in their costs, including for materials and staff, but also utilities. Business Secretary Kwasi Kwarteng is meeting with business leaders on Friday amid a big spike in energy prices which has put their production lines under pressure.
The bank’s Financial Policy Committee is keeping the so-called counter-cyclical capital buffer—reserves that banks must have in store to release during a downturn—at zero at least until December 2021.
By August Graham