Value of UK business loans written off by banks nearly doubles

26th May 2022

The value of UK business loans written off by banks nearly doubled in the last quarter of 2021, rising 87% from £190 million in the third quarter to £356 million in the fourth quarter according to new research by ACP Altenburg Advisory.

The research report found that write-offs of loans were subdued throughout Covid but are now rising as businesses struggle with inflation, including soaring energy prices and higher interest rates.

The end of Government-backed lending schemes such as CBILS and BBLS has also made it harder for businesses to roll over or refinance loans that are maturing.

Given the increasing headwinds businesses need to start planning for the possible impact of increased costs and/or interest rates. Without Government guarantees, SMEs will find it harder to get bank finance and will have to look more closely at alternative finance providers.

The rise in business loans being written off comes as 12,634 companies went insolvent in the last quarter of 2021, nearly four times as many as the previous quarter (3,471).

As business profits suffer from cost inflation more will be in danger of breaching the terms of their loan agreements, where those covenants are based on the profitability of that business. A breach of covenants may lead to a lender demanding repayment before the agreed maturity date.

Businesses need to talk to their banks as early as possible if they think they may breach any of the covenants of their agreement, with banks starting to undertake more stress testing on new borrowers. This is to ensure that businesses can afford repayments under higher costs and/or higher interest rates scenarios.

Previously stress tests would have typically assumed a 2% per year increase in a business’s cost base, but now many tests are assuming a 5% increase or higher.

Those looking to refinance debt or acquire new funding will need to ensure they get the right advice and correct information on their options, so they can find a funding solution that best suits their needs.