As inflation rockets and recession looms, many British businesses are struggling to secure affordable bank finance, piling pressure on the embattled UK government as it unveils a budget aimed at reviving the economy.
British fruit-grower Hall Hunter is one of thousands of businesses in Britain feeling the squeeze, forcing owner Harry Hall to consider the drastic step of lending to his own successful company to top up its expensive bank lending.
"I'm probably going to be the bank," said Hall, who can't secure a loan product from his bank to offset his high borrowing costs. He told Reuters he would likely inject some of his personal wealth into his business to insulate it from inflation rates of 11.1% and a recession that could last up to two years.
Banks are increasingly nervous about extending credit to small companies, according to data compiled by Reuters and interviews with lenders and business heads, as rising costs of debt, labour and raw materials put the business case of lending to such companies under unprecedented strain.
Lenders expect the supply of credit to the smallest firms, with annual turnover of under £1 million (about RM5.4 million) , to fall by 10.9% in the last three months of this year, a Bank of England (BoE) survey published last month showed.
This could spell trouble for new Prime Minister Rishi Sunak and finance minister Jeremy Hunt as they announce a new, austere financial blueprint on Thursday, seeking to stabilise the economy after their short-lived predecessors unleashed chaos in financial markets with plans for unfunded tax cuts.
Any crunch for Britain's small businesses, which often lack the scale to pass on cost rises to customers as easily as bigger rivals, could deliver a new economic body blow.
Such companies account for 48% of private sector employment and about £1.6 trillion, or 36%, of turnover, according to the Federation of Small Businesses (FSB), citing government data that defines small firms as having up to 49 staff.
FSB Chair Martin McTague told Reuters he met Sunak and Hunt last Friday to demand fresh fiscal support for small businesses, including relief on asset sales and tax credits on research and development.
"How are we going to get out of this hole if it's not small businesses? Those sectors that have been hardest-hit by the pandemic, are finding it very difficult to try and get the banks to provide them with support," he said.
'Make or break' for economy
Banks are still lending, but the risks and higher relative costs associated with funding the smallest businesses, many of which may not survive, means they often have no choice but to turn them away, four senior banking industry sources said.
Stephen Pegge, head of commercial finance at bank lobby group UK Finance, pointed to evidence that small and medium enterprises (SMEs) more broadly were securing credit - banks lent £6.5 billion to companies with less than £25 million turnover in September, BoE data shows.
"Lending is definitely flowing," Pegge added. "But there's no question that small businesses now have less capacity to increase their borrowing because you've got a slowing economy."
Indeed small companies in Britain see their access to credit at its worst level since 2015, according to a quarterly survey by the FSB of 1,383 small business owners.
Forty-two percent of applications for funding in the third quarter failed, up from 39% in the second quarter of the year, the survey found, while one-in-five firms seeking finance were quoted loan offers at interest rates higher than 11%.
Many small companies have also yet to repay state-backed loans extended to prop them up during Covid lockdowns, making their credit profiles increasingly unattractive. Only £4.7 billion from the £46 billion lent to small businesses under the "Bounce Back Loan" scheme had been fully repaid as of the latest July 31 data from the government.
"Business owners are having to look at alternative options, one of which is to dip into their own pockets," said Claire Burden, partner for advisory consulting at Evelyn Partners.
Others like Douglas Grant, CEO of Manx Financial Group, called for a permanent state-backed loan scheme to protect SMEs, saying this could act as the "fundamental difference between make or break for many companies and, in turn, our economy".
Banks 'don't have a choice'
Naresh Aggarwal, associate director of policy at the Association of Corporate Treasurers, which represents business finance staff, said banks were taking a pragmatic approach to lending as the economy falters to avoid costly writedowns.
Loans are still being issued and firms in breach of covenants linked to their debts are being offered waivers but support is coming at a price.
"Lenders are increasing the margin on the loan," he added. "And for most corporates, they don't have a choice. It's not exploitative, it is a risk premium," Aggarwal said.
Major banks have already set aside hundreds of millions of pounds of extra cash to cover potential losses.
Lloyds, which provided the most detailed breakdown for the July-September quarter, disclosed a 30% jump in the most severe category of problem loans in its small business unit compared to the end of 2021, hinting at why banks may tread carefully.
Companies of all sizes are already buckling under the strain in greater numbers. The number of quarterly company insolvencies in England and Wales hit its highest level in nearly 13 years in April-June, official data last month showed.
Small businesses face the biggest threat; one in four have considered closing down as a result of rising cost pressures, according to a survey of 1,930 firms conducted by business bank Tide in September.
"Businesses are finding it hard to demonstrate they are still sound businesses," said Richard Burge, CEO of the London Chamber of Commerce and Industry. "But they're only going to be sound if they can get access to the loans they need."