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Businesses pushed into highest debt in 13 years – study

August Graham, PA City Reporter
·2-min read

British businesses are more in debt than at any point for the last 13 years as they try to stay afloat during the coronavirus pandemic, according to new research.

Business lending is set to grow by 14.4% this year, according to estimates from EY Item Club, compared with a 2% increase last year, and a 1.4% average decrease between 2010 and 2019.

Government-backed loans have been “crucial” in backing up large and small British firms during the pandemic, and it may take until 2022 before companies are able to start reducing their debt.

It puts the crisis in sharp contrast to the 2008 financial crash when lending dropped off. Instead of banks needing bailouts, as they did 12 years ago, they are now the ones bailing out many firms across the UK.

In March, banks lent just over £30 billion, about 100 times usual amounts.

But lending to individuals, meanwhile, has fallen sharply in the last few months. Demand for consumer credit will fall 15.9%, according to the EY predictions.

It would be the biggest annual drop since 1993, when records began.

Mortgage lending will rise by 2.6% this year, the slowest growth since 2015.

Omar Ali, UK financial services managing partner at EY, said: “Covid-19 has caused unprecedented challenges for the UK economy, putting financial strain on both businesses and households, and has resulted in a staggering amount of money being lent to firms over a short period of time.

“With a weakened economy, banks face increasing write-offs on all types of lending and, with slow growth for consumer credit forecast, this will add pressure to their profitability and ultimately their ability to lend more to businesses to help kick start growth.”

Dan Cooper, UK head of banking at EY, concludes: “Even assuming the economy bounces back in the short term, we’re likely to see very weak growth in loans to home buyers and consumers for some time to come.

“However, the banks went into this crisis well capitalised and, despite the level of contraction in GDP this year, which the OBR says is likely to be the biggest decline for 300 years, they have extended significant levels of support to businesses and consumers and are continuing to help drive the economic recovery.”