Following the aftermath of the pandemic, we are taking a look back at the economy and how this has impacted business debt today. Before the arrival of COVID-19, only approximately 350,000 businesses in the UK were in debt. However, this figure has more than doubled since with now over 757,000 UK businesses experiencing debt.
With so many more businesses now in debt – we, therefore, post the question: why are more businesses in debt? Read on to find out more about what types of businesses are facing more debt today in the UK, and whether this is a cause for concern for the country’s economic stability.
Why Are More Businesses in Debt?
According to a report from the Bank of England, the rise in debt for small and medium-sized enterprises (SMEs) has particularly risen, with companies having to cut back on things like fun activities such as office parties and events and more, in order to balance their books. Though not all of the results reflect the true state of all SME debt in the UK (as some are not limited companies), it does highlight that most SMEs post-covid are experiencing debt.
Nevertheless, the report does state ‘the debt is likely to be more manageable’ as the majority of debt for SMEs stems from government-backed lending schemes. In this instance, such debt can be considered less ‘risky’ as these government-backed loans had longer terms, lower borrowing rates as well as options for those to pay as they grow.
Furthermore, 32% of SMEs at the time of the report had ‘sufficient cash to repay all debts in full’ yet may have been ‘conserving cash for future obligations such as rent and VAT arrears’. In contrast, this report does not take into account the SMEs which are now facing a post-covid economy where everyday living costs are rising exponentially.
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According to data from the Office for National Statistics, around 97% of adults in the UK during September 2022 reported that their cost of living had increased. While the Bank of England’s report may remain true, it does not reflect today’s living crisis. For SMEs, particularly, the rising cost of living will decide whether they remain afloat or not.
“Many small businesses incurred huge debts in the pandemic which they are struggling to repay and now the cost of living crisis is adding to that pressure right now,” Raj Kandola told the BBC.
While using debt for small and growing businesses has often been a viable option, today it is putting SMEs at risk of closure. Generally, debt is not always considered ‘bad’. In some instances, using debt accordingly can make business finances more manageable and has some advantages. For instance, borrowing a loan can mean the money borrowed is invested and repaid over a longer period of time at a lower interest rate.
Using debt, instead of equity, is often a business option for both SMEs and larger organisations. However, many SMEs today cannot afford to repay their debt. This may be due to many SMEs during the initial phase of the pandemic having below average creditworthiness – meaning they are not in the best financial position to repay any borrowed money in the face of inflation today.
What Are Examples of Business Debt?
But, what exactly is business debt? In short, there is both ‘good’ and ‘bad’ business debt. As briefly explored, ‘good’ debt can help businesses grow while they are still establishing themselves financially. Having access to capital is necessary for business growth, and is made possible through various lending schemes.
On the other hand, ‘bad’ debt occurs when businesses are not in the position to repay any money borrowed or perhaps even lend money to either clients or employees. Businesses which over rely on debt are seen as riskier to lenders and investors, and poses future risk of closure.
What Happens If You Don’t Pay Business Debt in the UK?
Though using debt can be advantageous in certain circumstances, not being able to manage debt or managing it poorly can have a negative impact on business. Yet, what exactly happens if you don’t pay business debt in the UK? Let’s take a brief look.
If a business cannot afford to repay their debts, they risk:
- Loss of employees
- Court cases
- Seizure of stock
- Repossession of any collateral
- More debt: late repayment fees and/or accrued interest
Bottom line, those that cannot afford to repay their debts eventually close. Nevertheless, there are some ways for businesses to better manage debt despite the ongoing cost of living crisis in the UK.
