Corporate Debt: The Impact of Covid-19
Posted on 9th February 2022 at 13:48
In October 2021, the Bank of England examined levels of corporate debt as part of its Financial Policy Summary and Record. This examination specifically compared the level of corporate debt at the end of 2021 – two years into the Coronavirus pandemic – with levels of the same in 2019, before the Covid-19 virus spread across the globe with deadly effect. Analysing the data in this way revealed a notable increase in corporate debt across the business sector, with the most significant increase being in small and medium enterprises, or SMEs.
How has debt increased, and why?
Over the course of 2020, total corporate debt increased by £79 billion. However, it is also clear that this increase is disproportionately carried by SMEs, rather than large businesses. In terms of total corporate debt, the rise was approximately six per cent. In terms of debt in SMEs, the rise was approximately a quarter. Moreover, the number of SMEs with U.K bank accounts now carrying debt, without having done so before the pandemic, has more than doubled. Specifically :
The number of SMEs with debt levels more than 10 times their cash balance has increased from 14% to 33%.
The number of SMEs with monthly debt repayments that exceed 15% of their income has increased from 3% to 18%.
The main cause of these increases can be traced straight back to the Coronavirus pandemic. The global marketplace had to endure a year of unprecedented disruption as countries around the world struggled to halt the spread of the contagion. Extended periods of ‘lockdown’ impacted both consumer and employee movement and behaviour, meaning that some SMEs had to put a temporary hold on their operations. It is this fact that highlights the difference in corporate debt impact between SMEs and larger enterprises – in the broadest of terms, SMEs tend to have a smaller financial buffer to draw upon, to survive periods of disruption. In addition, SMEs are more likely to operate within the service industries most impacted by Covid-19, including the hospitality, leisure and arts sectors.
During the first year of the pandemic, SMEs faced increased financial pressures. Income was significantly reduced or, in some cases, halted completely during lockdowns. At the same time, costs continued, including:
Premises and equipment costs – Even those businesses that did not use their premises during periods of lockdown needed to keep those premises and equipment available for post-lockdown re-start of operations, incurring the costs of ongoing leasehold agreements, and keeping utilities connected.
Staff retention – SMEs that were forced to temporarily close faced the issue of keeping employees on the payroll, despite a lack of corporate income. Those that could operate with staff working from home faced costs incurred by the need to fundamentally change the way the business operates, through staff allocation and re-location – in some cases needing to support staff with the necessary technology in their home setting.
Contractual obligations – Every business faced the task of evaluating the impact of Covid-19 lockdowns on its contractual obligations, incurring costs of renegotiation regarding the global nature of the pandemic impact.
What financial help was made available for businesses during the pandemic?
During the first national lockdown in the spring of 2020, the U.K government made several support packages available to businesses, to help them manage financial pressures and difficulties caused by the pandemic. These included:
Furlough scheme – A percentage of each furloughed employee’s wages could be claimed from the government. The furlough scheme ended on 30th September 2021.
Cash grants – Cash grants of various amounts were made available to both businesses forced to temporarily close, and those that were able to operate in a reduced capacity.
Business rates holidays – Business rates for the period 2020/2021 were cancelled for businesses operating in hospitality, leisure and retail. This was also extended to nurseries.
Extended Statutory Sick Pay reimbursements – While SSP normally begins on the fourth day of illness, this was extended, with the government reimbursing SMEs for 14 days of Covid-related absence, beginning on the first day.
Deferral of tax payments – VAT payments ordinarily due between March and June 2020 could be deferred.
Low-interest loans – A range of low-interest loans, including the Bounce Back Scheme, the Business Interruption Loan Scheme and the Covid-19 Corporate Financing Facility were made available.
Commercial tenancy protections – Fixed term legislation provided protection for commercial tenants, preventing eviction in the event of rent arrears during a specific period.
With all data indicating a significant rise in corporate debt across the country the extent of financial pressure on SMEs, caused by the public health emergency, is clear to see.
Help with lasting economic impact
The current Covid-19 situation is very different to the circumstances of 2020 and 2021. During those initial waves of Coronavirus infection, businesses across the country sustained significant economic damage. Now, as we head into 2022, the emphasis of the U.K government is on businesses remaining open and operational despite ongoing infections. This means that financial support from the government is reduced, while economic uncertainty in the marketplace remains.
The lasting economic impact of Covid-19 on businesses, therefore, features two factors. Companies – particularly SMEs – are dealing with both increased corporate debt and an operational environment that is still highly challenging. Covid-related employee absence continues to affect day-to-day functions and supply chains, and ongoing Coronavirus infection waves are also causing periods of consumer hesitancy. The latter makes dealing with the former even more difficult.
While these ongoing circumstances make for an uncertain future, engaging the expertise of highly trained Insolvency Practitioners can help businesses to achieve the outcome that is best for all parties. Working with Insolvency Practitioners, such as Smith & Barnes, is not a process that necessarily leads to bankruptcy or the closure of the business. Depending on the financial position of the organisation, there may be other, more appropriate solutions, such as a Company Voluntary Arrangement (CVA) or Administration, which aims to rescue the business as a going concern wherever possible.
Smith & Barnes Insolvency Practitioners are Yorkshire-based experts, helping businesses across the U.K. With quick, efficient service and a low cost, fixed fee model, Smith & Barnes provide straightforward, simple advice for any organisation dealing with corporate debt. Call today to find out how Smith & Barnes can help.
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