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Small businesses struggle with debt as lending hits £104bn

British Business Bank said
British Business Bank said "there could be significant further demand for funding throughout 2021." Photo: Getty Images (fizkes via Getty Images)

A record levels of smaller businesses sought external financial support in 2020, new data by British Business Bank (BBB) found.

The report said gross bank lending to SMEs, excluding overdrafts, was up 82% to £104bn ($144bn), driven by use of government loan schemes, with significant further demand for such loans expected in 2021.

The report also found almost half (45%) of SMEs applied for external financial support in 2020, compared to 13% in 2019, and that nine in ten (89%) businesses did so because of the impact of COVID-19.

Around 75% of these SMEs did so to help with their cashflow.

“That three quarters of small firms are accessing finance to help manage cashflow underscores how COVID-19-linked disruption is exacerbating our late payment crisis, a crisis which destroys 50,000 firms a year at a cost of at least £2.5bn to the economy," the Federation of Small Businesses' national chairman Mike Cherry said.


“The question now is, what steps should policymakers and banks take to ensure emergency debt delivers value to the economy? More than half of those with facilities say a student loan approach – whereby repayments are only made once a firm is profitable again – would mark a helpful way forward," he added.

Watch: What UK government COVID-19 support is available?

He suggested that greater incentives to adopt an Employee Ownership Trust model could also help.

Speaking about chancellor Rishi Sunak's new scheme to tide businesses over, Cherry said: “We very much hope the Recovery Loan Scheme proves successful over the years ahead and look forward to regular updates on take-up.”

The scheme will offer loans from £25,000 to £10m, with an 80% state guarantee.

It will replace Coronavirus Business Interruption Loans, its counterpart for large companies, CLBILS, and the fully state-backed Bounce Back Loans, which together have loaned struggling firms £73bn.

READ MORE: £65bn more in COVID spending and 'biggest tax cut in history' for business

“The report suggests there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic and pivot towards growth, adapt to life outside the EU, improve productivity and transition to a new net zero economy,” BBB said.

Its study also showed businesses shifted away from traditional forms of external finance to utilise government-backed schemes and support.

The utilisation of bank overdrafts, credit cards and asset finance all fell, while the only increase in the usage of traditional repayable external finance was seen in loans, up from around 10% in previous years to 25% in 2020.

Around 8% of small businesses sought finance, at least in part, to pivot or change their business model and 7% to invest in the digital capability of their business.

In Q4 2020, more than a third (37%) of smaller businesses expected to stay the same size over the next 12 months, 33% expected to shrink, and 4% to sell or to close.

Only one in five (21%) were expecting to grow, compared to 28% the previous year. Small and medium- sized businesses were most likely to expect to grow (35% and 38% respectively) compared to 21% overall.

SMEs in business services (25%) and production (23%) sectors were most optimistic about their prospects for growth, with businesses in construction and other services sectors least optimistic (17%).

The report suggested there could be significant further demand for funding in 2021, as businesses continue to recover from the effects of the pandemic.

Watch: What is the Bounce Back Loan scheme?