The Bank of England’s latest Financial Stability Report, released this week, points to the particular vulnerability of the SME sector as the economy emerges from COVID-19 restrictions.

The twice yearly reports, compiled by the Bank’s Financial Policy Committee, sounded a warning about increased corporate indebtedness, in particular amongst smaller firms with weaker balance sheets.

Summary
– Insolvencies will increase as government support unwinds
– The reinstatement of Winding up Petitions in September will be significant
– The end of VAT and Rent Deferrals could be a catalyst for business distress

As the economy recovers and government support unwinds as planned, some businesses may face additional pressure on their cash flow and insolvencies could increase.

For example, businesses may face substantial repayments as VAT and rent deferrals begin to lapse, costs could increase as broader government support such as the CJRS unwinds, and businesses that have borrowed under government support schemes will need to start making repayments on them. Additionally, the end of the temporary ban on winding up petitions in September 2021 is likely to lead to an increase in insolvencies over the next twelve months.”

Bank of England Financial Stability Report, July 2021

UK Business Sectors in Distress

Sectors ‘that are more affected by economic activity being curtailed’ find themselves in particular jeopardy, the report notes.

Bank staff analysis demonstrates that as of January 2021, 11.8% of SMEs in these sectors are already in arrears on their outstanding loans or have formally defaulted