Companies will have borrowed more than £60 billion to help them to survive the pandemic by the end of this year, according to forecasts that lay bare the precarious state of corporate Britain’s finances.
Net lending to non-financial firms jumped to £35.5 billion last year, from a net £8.8 billion in 2019, as companies tried to secure emergency government-guaranteed loans from banks, the EY Item Club has found.
The debt burden is set to rise still further. The EY Item Club forecast that bank lending to businesses, including through the government schemes, would increase by 5.4 per cent this year, which equates to an extra £26 billion net of repayments.
Many companies have had to borrow to shore up their finances during the Covid-19 outbreak and the provision of state-backed debt through commercial lenders has been at the heart of government measures to aid the economy. However, there are fears that many small and medium-sized businesses have taken on debt they will struggle to repay, inflicting loan losses on banks.
It emerged last week that the Treasury will give the 1.4 million small businesses that have borrowed almost £45 billion through the bounce back loan scheme the option to stretch repayments over a longer period to relieve the pressure on their finances.
Anna Anthony, UK financial services managing partner at EY, said: “By the end of this year, businesses will have borrowed in the region of £60 billion net since the start of the pandemic, which is a colossal amount, especially as for many it is just about survival, not expansion or growth. And the prospect of some, if not many firms, not being able make the required repayments is concerning for all involved.”
At the same time, Britain’s banks face a slowdown in consumer borrowing as households that have not suffered from job losses during the pandemic curtail spending during lockdowns, boosting savings. Many borrowers have used their space cash to repay debts.
The EY Item Club said that net lending through personal loans and credit cards declined by 9.9 per cent last year, the biggest fall since records started in 1994, and went negative. About £3.9 billion of consumer credit was repaid during the final quarter of last year, while households’ bank deposits surged by £141 billion between March and December, compared with £42.5 billion in the same period a year earlier.