Small businesses face risk of high indebtedness

13th October 2021

The number of heavily indebted small businesses rose considerably over the course of the pandemic, the Bank of England has warned.

Analysis by the Bank’s Financial Policy Committee has shown that debt taken on by SMEs rose by a quarter, with many companies which had not previously borrowed going into the red for the first time.

This compares to a 2% rise in debt for larger companies. A third of small businesses now have a high level of debt compared with 14% before Covid-19. High debt firms are defined as businesses whose debts are ten times greater than their cash balances. Although the borrowing has been cheap, there could be pockets of difficulty in sectors hit hardest by the pandemic, such as leisure and hospitality.

Commenting on the figures, Mark Supperstone, Managing Partner at ReSolve, the business advisory and investment practice, said “Over the weekend the Bank of England announced that there has been a large increase in small businesses finding themselves “heavily indebted” – this is not a surprise considering the difficulty companies faced during Covid and the availability of cheap debt thanks to Government support.”

“What is important to remember is high debt, in and of itself, is not dangerous. Leverage, in many ways, is a good thing especially if cash flow is steady and plentiful and the interest rates are low. However, before new debt is taken on, businesses need to have properly planned for repayment and budget responsibly ensuring that proper cash flows are prepared.  If directors envisage problems with repayment on the horizon then they should speak to their lenders as soon as possible. By opening the lines of communication, all parties can find a mutually beneficial route.“