Business borrowing from banks increased due to coronavirus
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2020 has been a struggle for many businesses, something which can be seen in the recent increase in businesses borrowing from banks due to Coronavirus. With many companies struggling to bring in the same cash flows as previous years and seeing a dramatic decrease in footfall or orders, it has never been more challenging for them to stay afloat. According to data from the economic forecaster, EY Item Club net, borrowing from banks rose to £43.2 billion between January and August compared to £8.8 billion in 2019. This is almost a five times increase in the space of just one year. The Coronavirus pandemic has impacted almost every company around the globe, from power supply companies such as GFF Power, to restaurants, bars, and travel agents.
The UK Financial Services Managing Partner at EY, Omar Ali, said: “Financial Services Firms entered the pandemic in a position of capital strength and have supported the economy and business to unprecedented levels since March. However, rising unemployment and the ongoing challenges faced by small businesses mean the outlook for the sector is testing.”
“For the vast majority of firms, the loans appear to have been critical, and it is forecast they won’t start to repay debt, and reduce their borrowing, until 2022 or even later,”
New schemes have been implemented to help businesses who need a load, including the Coronavirus Business Interruption Loan Scheme (CBILS), which provides financial support to smaller firms affected by the Coronarivus pandemic and lockdown.
The scheme is available to any business that is based in the UK and has an annual turnover or up to £45 million. The company must be able to show that it would be viable were it not for the pandemic and that it has been adversely impacted by the Coronavirus pandemic. If a business wishes to borrow over £30,000 as part of the loan, they need to confirm they weren’t classed as a business in difficulty as of the 31st of December in 2019. The loan’s maximum length depends on the type of finance you apply for and will be up to three years for overdrafts and invoice finance facilities or up to six years for loans and asset finance facilities. Businesses can apply from any sector aside from those who are banks, insurers or reinsurers, public-sector bodies, and state-funded primary and secondary schools.
Due to the recent announcement of another lockdown for November, The Treasury is extending its emergency business loan scheme, which will allow firms to “top-up” their borrowing. This is aimed to keep businesses afloat in what is guaranteed to be a tough time ahead for many companies. Businesses have until the end of January to apply for an emergency business loan, such as the above, as well as bounce back loans and the CLBILS scheme for larger firms. The prior deadline for application was the 30th of November, giving companies an extra two months to apply if needed.
“To help more businesses access additional support, deadlines for applications to our government-backed loan scheme and the Future Fund have been further extended until 31 January 2021,” the chancellor, Rishi Sunak, said on Twitter.
As well as this loan, businesses can also apply to top up existing loans. For any small businesses who already received funds through the BBLS program, this means they can add a bit of extra cash flow to stop taking on too much additional debt. The Government released a new document outlining the benefits it is offering to businesses, which states:
“We will also adjust the Bounce Back Loan Scheme rules to allow those businesses who have borrowed less than their maximum (i.e., less than 25% of their turnover) to top-up their existing loan. Businesses will be able to take-up this option from next week; they can make use of this option once. We understand that some businesses didn’t anticipate the disruption to their business from the pandemic would go on for this long; this will ensure that they are able to benefit from the loan scheme as intended.”
While this is good news for businesses, banks could potentially face losses in the upcoming months as businesses might miss loan repayments. It is expected that business loan losses will rise from 0.3% last year to 0.4% in 2020 and 0.5 in 2021. There are plenty of resources businesses can look for online that give information on the Gov schemes and any available support.
