South West businesses piling on debt during lockdown

Bristol Arnolfini

The pandemic has badly damaged the finances of businesses across the South West, with many business owners increasingly reliant upon costly sources of borrowing such as overdrafts and credit cards, a Business West survey has revealed. 

40 per cent of the 550 businesses that responded to the survey reported a higher level of indebtedness than a year ago, whilst a similar number had 6 months or less of cash reserves remaining, laying bare the huge financial cost of coronavirus despite extensive government interventions in the economy.

With pressures on firms growing after multiple lockdowns, 28 per cent of businesses seeking out finance opted to utilise the Bounce Back Loan Scheme (BBLS) – a government backed initiative offering favourable interest rates and flexible repayment terms, but this scheme has now ended.

The use of overdrafts and credit cards by local businesses is also relatively high, at 22 per cent and 19 per cent respectively, considering that these sources of finance are more expensive than government backed emergency finance. They are also more common than the formal government backed Coronavirus Business Interruption Loan Scheme (CBILS), which only 16 per cent of respondents chose, typically larger businesses within the survey respondents. The percentage of businesses borrowing money from family and friends is also quite significant, at 11 per cent.

Bristol-based marketing agency Feisty Consultancy was one of the businesses that complained of receiving a rough ride from their banking provider over the past 12 months.

“During the first lockdown at least, the banks were helpful in reducing/removing fees,” said Feisty Consultancy’s Managing Director Vikki Little. “But this stopped some months ago and hasn’t been reinstated, despite the fact that the situation is now worse for many businesses. I wrote to my bank regarding this and was told ‘tough’ essentially.”

If the increased prevalence of short-term borrowing wasn’t worrying enough for the state of business finances, it is particularly so for the self-employed. Two fifths of respondents identified credit cards as their main source of financing during the pandemic – a finding which suggests that the self-employed (many of whom fell through the cracks of government support schemes) were unable to access cheaper, alternative forms of borrowing.

Against this background, Business West is concerned at a potential ‘finance crunch’ coming for small businesses. With repayments starting on government backed loans and the level of (often high cost) debt from financial institutions and others, the burden of this debt is expected to act as a drag on business recovery.

Unsurprisingly, after a year of lockdown restrictions, almost half of the 550 participants reported a deterioration in their cashflow, taking this to the lowest point in the last 3 years, with responses consistent across both the services and manufacturing sectors. “It is dreadful,” said Val Hennessy of the International House language school in Bristol – one of the businesses speaking out. “Virtually no income and little prospect of a real increase in income in the near future as international travel is banned or the costs of travelling to the UK for students is too off-putting. We cannot risk borrowing anymore because the future is so uncertain.” she continued.

For businesses such as The Zoots band, based in Wiltshire, government financial support has unfortunately done little to make up for the income shortfall of a year ravaged by stop-start lockdown restrictions. Its proprietor Jamie Goddard revealed that he is “currently in £30,000 debt” adding “with SEISS grants of only £2500 that covered about 1.5% of my usual turnover” and hopes they “will get something eventually” to address the situation.

Aside from widespread financial worries highlighted by the survey, the region-wide study also found that almost 40% of South West employers had experienced staffing issues as a direct result of school closures.

Stephen Sage, Managing Director of ACES Ltd – an electronics firm based in Bristol – said that along with school closures: “Social distancing measures have slowed our production along with…home working,” before adding “material shortages have also compounded the problem.”

The cumulative effect of rising debt levels and lockdown restrictions on business growth and performance across the region is plain to see.

More than half of respondents reported that their turnover, profitability and cash flow have been negatively impacted as a result of the pandemic. The percentage of businesses impacted in the retail, tourism, food and drink, and consumer services industries is even worse (more than 60 per cent), with many delaying growth plans and experiencing reduced profit margins.

Despite the pain of the past 12 months, businesses are remarkably upbeat regarding the future prospects of the UK economy, with business confidence also showing signs of lifting following government’s announcement of an irreversible roadmap out of lockdown in England. On both measures, this represents a marked uptick when compared to the last quarter’s results.

Business West Managing Director Phil Smith, said: “There have been few winners and very many losers as a result of the pandemic, a good proportion of whom have taken on added debt to help see them through.

“In the best-case scenario, we will see pandemic related debts repaid quickly as business activity begins to ramp up and accelerate as lockdown restrictions are lifted. In the worst case, a mounting debt burden stymies business growth and proves a long-term drag on the region’s economy.

“To see businesses using the flexibility of the BBLS is pleasing. However, the fact that more and more businesses are turning to credit cards and overdrafts to solve cashflow issues is concerning. The reliance on friends and family may also be interpreted as a market failure that government and lenders would be wise in addressing.

“We are worried about small businesses and the self-employed’s access to suitable finance during the recovery period. At the end of March both BBLS and CBILS closed, and CBILS was replaced by the successor Recovery Loan Scheme. However, this is available via commercial bank lending and is only government guaranteed for 80 per cent of the loan. Our findings highlight a looming finance gap for smaller firms, given the particular finance needs of smaller businesses, who appear to not be utilising CBILS, perhaps because it is harder to access this more formal bank form of financing. We think further government finance schemes for these smaller firms may be needed.

“After business’ most challenging year in living memory, it goes without saying that eyes remain fixed on the roadmap out of lockdown, as only then do we have the realistic prospect of healing the wounds inflicted by the pandemic and repairing business finances.”