While significantly more small and medium-sized enterprises (SMEs) are in debt than pre-Covid, this debt is likely to be manageable for the majority, a Bank of England analysis has found.
In Bank Overground – a Bank of England blog that shares its internal insights – central bank staff looked at data from regulatory reporting and internal calculations and revealed that the share of SMEs with debt has more than doubled since the onset of the pandemic.
The proportion of limited company SMEs with debt was around 45 per cent by May 2021.
By looking at data from these sources and company research solution Fame (Bureau van Dijk), the Bank of England said that among those SMEs that do have debt there has been a rise in those with high debt burdens.
Around a third of SMEs that have debt in this data set have debt levels more than 10 times their cash balances or are in their overdraft.
About a fifth have monthly debt repayments that are over 15 per cent of their current account inflows and around 10 per cent of companies fall into both these categories.
The Bank of England concluded from its analysis that although the risk of defaults remains, the debt is likely to be manageable for the majority of SMEs.
The Bank said this was because the majority of new bank loans have been issued through state-backed lending schemes with lower borrowing rates, while the government’s pay as you grow options have supported businesses and precautionary lending that is more conservative.
“While the risk of defaults remains, the debt is likely to be manageable for the majority of SMEs,” the Bank of England said in the blog.
“The vast majority of new bank loans have been issued via government-backed lending schemes where terms were longer, and borrowing rates lower, than most businesses would otherwise have been able to obtain.
“The government has also introduced pay-as-you-grow options for those companies which may struggle to pay back the loans on the current terms.
“Additionally, some of this lending is likely to have been precautionary. 32 per cent of limited company SMEs who have debt in this data set currently have sufficient cash to repay all debts in full – although some may be conserving cash for future obligations such as rent and VAT arrears.
“Government guarantees on this lending limit risks to bank capital. But monthly debt repayments could drag on SME profitability for the foreseeable future and reduce the amount of income available for investment.”