Many businesses that took out emergency loans during the Covid-19 pandemic are now at risk of collapsing because of those same loans, the Bank of England has warned.
UK businesses that before Covid were said to have been turned down for loans have been able to resort to government-backed programs during a pandemic.
Now, many of them are facing loan bills that they might be unable to pay off.
The Bank of England warned on Friday that increased borrowing during the pandemic has likely put more businesses at risk.
“The increase in debt – although moderate overall – has likely led to an increase in the number and scale of the most vulnerable businesses,” he said.
“As the economy recovers and government support, including restrictions on liquidation orders, wanes, corporate insolvencies are expected to rise from historically low levels,” he added.
About 1.7 million businesses borrowed money under three emergency lending programs launched last year.
Many of them were small businesses that had never borrowed before, and desperate for money to avoid an immediate collapse.
Although the loan terms are generous – the interest on Bounce Back loans, which used to be the most common, is only 2.5% – businesses still have to pay their banks back.
They have up to 10 years to do so and can request multiple lower payment periods.
The proportion of small and medium-sized businesses that see 15% or more of the money coming in through the door going directly to cover debt payments has increased six-fold since before the pandemic, the bank said.
Before Covid, 3% of companies said they paid 15% of their cash receipts, now this figure has risen to 18%.
In its financial stability report, the Bank of England also said the outlook for the economy is still “uncertain”.
Recently, the pace of recovery from the pandemic has slowed and inflationary pressures have increased.
Many companies have reported increases in their costs, especially for materials and personnel, but also for utilities. Business Secretary Kwasi Kwarteng meets with business leaders on Friday amid a sharp rise in energy prices that has put pressure on their production lines.
The bank’s financial policy committee keeps the countercyclical capital buffer at zero until at least December 2021 – the reserves that banks must have in reserve to release them in a downturn.
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