PKF Francis Clark has advised eXmoor pharma, the Bristol-based cell and gene therapy (CGT) services experts, on an initial investment of £12m ($17m) from specialist healthcare investment…
Last week I read on the BBC website “Business borrowing from banks ‘up fivefold’ amid coronavirus”.
After some investigation I found the source material for this, EY ITEM Club Outlook for financial services – Autumn 2020, and I have summarised the statistics and considered the implications.
Key statistics include:
- Banks have supported £62bn of lending from government to date
- The total stock of bank lending to businesses is forecast to reach £493bn at the end of 2020, a 11% year on year increase (this compares to an average of -1.4% from 2010 to 2019)
- UK firms’ net borrowing this year expected to be 5 times higher than the amount borrowed in 2019
- Net of repayments, banks lent non-financial companies just over £34bn in March – almost 50 times the average monthly net lending in 2019
- Forecast shows that business lending growth of more than 5% in 2021
- Business loan losses forecast to rise from 0.3% in 2019 to 0.4% and 0.5% this year and the next – and new lockdown restrictions (*) could see potential for loan losses to increase
The report also picks up on the previously reported figure for “likely credit and fraud losses of between 35% and 60% for Bounce Back Loan Scheme” – equating to an implied cost of the Government of £15bn to £26bn.
(* = and report was drafted pre-announcement of national lockdown starting 5 November, see further below).
The implications – sources of debt funding
As we have commented previously our experience indicates that bank borrowing has been more difficult for businesses to obtain since the spring – and this is not surprising given the amount the banks have lent to date.
It was interesting to note in the report that EY’s forecast shows that business lending growth of more than 5% in 2021 – which does give some confidence that banks will not dry up completely going into next year and this is echoed by our more recent enquires for clients.
What we have also seen since the Spring is a rise in the prominence of non-bank lending. A number of the deals we are currently working on involve an alternative funder and we expect this trend to continue and, in this context, I have noted over the past couple of weeks some significant fund raises by lenders in that market.
I have also seen an increase in use of Vendors’ Loans in highly leveraged transactions – as founders still wish to exit maximising post tax returns, trading some cash now for completing a transaction in the current favourable capital gains tax regime.
The short term – more debt to flood out?
As reported in the Sunday Times “Following the decision by the Chancellor to extend the deadline for applications for bounce back loans and permit top-up loans from November to January banks are bracing for a flood of small business customers seeking access to the cash..”
The longer term – the threat of zombies?
As the Sunday Telegraph headline screamed out “Debt-laden zombie firms may stifle recovery”. The figures behind this headline and comments in connection with how this issue may be addressed are detailed in my companion piece to this blog here.
PKF Francis Clark
We are keen to make our clients, and the wider businesses communities in which we operate, aware of the full range of funding options potentially available to them. We feel that this may be of even more importance going into the new year.
If you have specific questions regarding debt funding for your business, please do not hesitate to contact me or your usual point of contact at PKF Francis Clark.