Businesses across the UK are becoming increasingly wary of borrowing, with research suggesting that rising numbers of peers falling into financial distress is fuelling the caution.
Figures released this week by the British Business Bank, the government’s economic development agency, indicate that more SMEs have developed a “strong aversion” to taking on new debt, while fewer than half accessed finance last year.
For some companies, however, it may be too late to rein in borrowing. New data from Begbies Traynor’s “red flag” study shows that more than 650,000 businesses ended last year in significant financial distress – a marked increase on 12 months earlier. Those deemed to be in critical distress surged by 50 per cent to nearly 47,000, with the construction and support services sectors particularly affected.
David Hopkins, a restructuring and turnaround partner at Begbies in Manchester, warns that business owners should act quickly if they spot trouble ahead. “Delays in customer payments or project starts can cause cashflow issues months later,” he said. “People often hope things will magically improve but, without real changes, the problems remain. Head-in-the-sand is never the right approach.”
While financing remains available for those under pressure, Gary Burns, head of construction at MAF Finance (part of the Begbies group), cautions that it comes at a price. “Funds aimed at distressed borrowers tend to charge more due to the risk,” he said. One strategy to manage shortfalls is to release equity tied up in assets like plant and machinery, although timing is crucial as secondhand equipment values in sectors such as construction are highly volatile.
Refinancing through specialist lenders can provide relief from immediate repayment demands via staged or balloon payments, allowing businesses to postpone some larger sums until later in the loan term. Some lenders may also accept seasonal or varied payment schedules to ease the strain when trading slows.
Hopkins affirms that the British Business Bank’s findings reflect what his firm is seeing: “We’re advising more businesses looking to cut back on debt. High interest rates are putting significant pressure on those already carrying large borrowing.”
Yet even as SMEs grow wary, alternative lenders are busier than ever, accounting for 60 per cent of the £62 billion in gross business lending last year. These lenders often lend at higher rates, given they do not rely on deposit-based funding, but have refined their risk assessment processes, enabling them to approve businesses that might be turned away by high street banks.
Burns notes that margins on unsecured lending by these alternative players have fallen over the past five years thanks to fierce competition, which has helped ease rates slightly. Still, companies looking to refinance Covid-era debt must bear in mind that government guarantee schemes generally do not extend to repaying existing pandemic loans.
The Growth Guarantee Scheme – the main government-backed programme – offers a 70 per cent guarantee on facilities up to £2 million, reducing risks for lenders and enabling lower interest rates in some cases. While conditions remain challenging, SMEs with prudent strategies and clear foresight may still find viable ways to manage debt and avoid the pitfalls of financial distress.
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Rising debt distress sparks borrowing aversion among UK firms