Banks write off nearly £400m in business loans

The value of business loans written off by banks in the UK nearly doubled in the last quarter of 2021, with more than 12,000 companies filing for insolvency in the same period, according to new research.

Small businesses were thrown a lifeline during the pandemic when the Treasury introduced schemes such as CBILS and BBLS, but as these schemes are wound down small businesses are feeling the effect.

The value of UK business loans written off by banks rose by 87 per cent, from £190million in the third to £356million in the fourth quarter of 2021. 

As the government-backed Covid schemes wind down small businesses are feeling the strain

The rise is in large part because write-offs had been subdued during the pandemic, says debt advisory specialist Altenburg Advisory.

Now small firms are grappling with the double whammy of rising energy prices and a hike in interest rates.

‘With an increasing number of headwinds in the economy, businesses will need to start contingency planning around their finances and what impact increased costs or interest rates will have. 

‘Without Government guarantees, SMEs will find it harder to get bank finance and will have to look more closely at alternative finance providers,’ says Dan Barrett, a partner at Altenburg.

In March, UK businesses recorded the largest monthly increase in input prices since records began as the government-backed pandemic schemes came to an end.

Now as businesses start to suffer from inflation, which reached seven per cent last month, Altenburg warns businesses are in danger of breaching the terms of their agreements, where the covenants are based on profitability.

A breach of covenants could lead to a lender demanding repayment before the loan’s maturity date.

Banks tighten stress tests on new borrowers 

And it is not just firms with outstanding debt which will suffer from the economic turmoil as banks start to undertake more stress testing on new borrowers.

Altenburg says tests would previously have assumed a two per cent year increase in a firm’s cost base, many are now assuming five per cent or higher.

‘The unstable economic climate in the UK and cloudy outlook means businesses will need to be careful when assessing their funding options. 

‘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,’ says Barrett.

It comes as 12,634 companies were forced to file for insolvency in the period, nearly four times as many as the 3,471 in the previous quarter.

Recent figures show this trend has continued in 2022 with voluntary insolvencies in England and Wales reaching their highest level for 60 years in the first quarter. 

The increase was driven by voluntary liquidations, which rose by 117 per cent to around 4,300.