Small businesses in the UK are seeking advice on ways to escape dangerous levels of debt built up in government-backed loans during the Covid-19 pandemic, with some considering prepack administrations.
Begbies Traynor, the listed restructuring company, said its analysis showed more than half of UK businesses were carrying “toxic debt” that they might struggle to repay over the next 12 months.
Julie Palmer, partner at Begbies Traynor, said she had seen an increase in inquiries about the prepack process — an insolvency procedure where a company arranges a deal to sell assets before appointing administrators. That can preserve value and leave directors able to continue running operations.
“The high percentage of companies with toxic debt across sectors and the rising debt of corporate UK is alarming,” said Palmer. Company insolvencies rose to 1,446 in September, up by 100 from August and 56 per cent higher than the same month last year, according to the Insolvency Service.
Small business debt shot up last year after the pandemic forced many companies to turn to government-backed bank debt to survive.
The UK government last year offered to guarantee bank loans through various support schemes, with more than £75bn of debt now backed by a full or partial guarantee by the state. This includes about £47bn in so-called “bounce back” loans that offered up to £50,000 for struggling small businesses with relatively little paperwork.
Banks have so far found that the proportion of problem loans in their “bounce back” portfolio has been lower than initially feared at between 5 and 10 per cent. However, Palmer said businesses were only beginning to work out whether they could afford the repayments. Creditors have also been slow to pursue businesses for their money — a process that she thinks will accelerate now that courts are reopening.
Palmer said this would include the HMRC, which needs to collect a year’s worth of deferred taxes at a time when other government support schemes such as furlough have ended.
Sectors particularly vulnerable to toxic debt include real estate and property, hotels, bars and restaurants.
“The longer they do not have payment, the longer they themselves are at risk of transforming into ‘zombie’ businesses racked with debt and trying to gather income to service that debt,” said Brendan Clarkson, director of national creditor services at Begbies Traynor.
The Bank of England this month warned that many companies that taken out emergency loans were at risk of collapse.
“The increase in debt, though moderate in aggregate, has likely led to increases in the number and scale of more vulnerable businesses,” it said. “As the economy recovers and government support, including restrictions on winding-up orders, falls away, business insolvencies are expected to increase from historically low levels.”
The proportion of small and medium-sized companies that paid 15 per cent or more of their income to cover debt payments had increased sixfold since before the pandemic, the BoE said.
Meanwhile, many companies that used the coronavirus business interruption loan scheme (CBILS) and some that used the coronavirus large business interruption loan scheme (CLBILS) also face higher costs if the Bank of England raises interest rates because they did not fix their repayment rate.
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