Worrying Signs for the UK Economy & What it Means for Borrowers

The Bank of England Monetary Policy Committee kept interest rates at 0.75% and predicted a 33% chance of a recession by the first quarter of 2022.

Red Flag Alert’s quarterly report on financial distress highlights the property sector as the biggest struggler – with a 2% quarter-on-quarter increase in those businesses classified as being in significant financial distress.

Looking at a one year time horizon Red Flag Alert shows worrying trends in a number of sectors including:

• Hotels & accommodation: 8% year-on-year increase of businesses in significant distress.
• Sport & health clubs: 5%.
• Leisure & cultural activities: 4%.

Worryingly, these sectors all include a large number of SMEs.

Overall, Red Flag Alert report that 14% of businesses are facing significant distress and the average debt is £66,226 – up from £29,872 only three years ago.

Feedback from the Market is Worrying

The FSB’s quarterly Voice of Small Business Index provides insight into business confidence – it points to some worrying trends:

• The FSB’s index of small business confidence is down 22 points compared to last year, the biggest fall since the EU referendum.
• Business investment decisions are on hold; 72% are not planning to increase investment.
• Operating costs, driven by high wage costs are on the rise.
• 24% of exporters report international sales have declined.

Bibby Financial Services also produce a quarterly SME Confidence Tracker Survey which also reports elements of waning confidence:

• 50% of SMEs believe a recession this year is likely (more negative than the Bank of England’s 33% by Q1 2020).
• 44% of businesses are reporting cashflow struggles.
• 54% of businesses have shelved investment due to economic uncertainty.

The Impact on Raising Capital

The Bibby SME Confidence Tracker reports 21% of businesses feel banks are less willing to lend to them, and whilst there is a 6% increase in businesses seeking finance, four in every ten are using credit cards.

It has been widely reported that the poor performance of peer-to-peer lenders is indicative of an uncertain business climate. Funding Circle recently cut its growth forecast in half, with chief executive Samir Desai explaining: “The uncertain economic environment has reduced demand from small businesses and led us to proactively tighten lending criteria”.

The Funding Circle share price has fallen dramatically from its flat price of 440p to around 113p on the 1^st August.

The FSB’s Voice of Small Business Index reports that more firms are finding applications declined:

• 14% of businesses have applied for credit in the past three months (down 0.8% from Q1).
• 29% were unsuccessful (up 9.8%).

These figures are stark – a considerably lower number of businesses are being accepted for credit. For the businesses accepted, interest rates are more favourable (47% were offered rates of less than 4% – a 10.3% year-on-year increase in businesses offered the lower rates).

With the combination of more applications for credit being declined and lower rates, it seems lenders are focused on lending to the most stable subset of business – and are willing to offer good rates to secure businesses.

What This Means for Borrowers

With uncertainty set to persist until at least a conclusion on Brexit it seems traditional lenders are going to remain risk averse – especially in light of a likely post-Brexit rise in interest rates.

This is bad news for many borrowers. Every bank will have a different set of lending criteria but with acceptance rates trending downwards it’s more likely that applications with any degree of uncertainty may face rejections. This uncertainty will likely include:

• Adverse information like CCJs.
• New businesses.
• Lack of management accounts.
• Businesses with atypical assets.
• Lending that requires a cross-company guarantee.
• Complex restructuring situations.
• Unusual business propositions.

Traditional lenders aren’t renowned for speed but any circumstances that don’t fit lending criteria are likely to take even longer to pass due diligence.

Reparo Finance – A Lender That Listens

At Reparo, we take a different approach to traditional lenders; we look at the specific circumstances of every business rather than apply set lending criteria. This has a number of advantages for borrowers:

• We will look at your business proposition as a whole, and consider a range of qualitative factors like your past success, industry trends, specific assets and circumstances of any adverse information.
• Our team will pick up the phone and have a conversation – we’ll spend the time looking for a solution and if we’re unable to help you’ll know very quickly.
• Deals are completed quickly; our credit committee meet regularly so decisions can be made in the timeframe you require.
• Alongside our team of lending experts is a group of partners that are similarly committed to completing deals quickly.

We provide loans between £10,000 and £2m. If you need finance but are worried about a lender rejecting your application get in touch for a no obligation conversation to see if we can help. Reach us on sales@reparofinance.co.uk or 0161 451 5710.