Nearly a third of smaller companies cannot cover a week of turnover, Bank says

The number of firms with enough cash for a week has reduced since the pandemic, back to more normal levels

Companies that are highly exposed to energy prices could face a big hit (John Stillwell/PA)
Companies that are highly exposed to energy prices could face a big hit (John Stillwell/PA)

The proportion of smaller companies without enough money to last them for a week has jumped as businesses burnt through the cash they borrowed during the pandemic.

The Bank of England said that 31% of small and medium-sized enterprises did not have enough cash to cover seven days of turnover in February, up from just 21% during the pandemic.

It warned that some businesses are likely to fail as the cost of doing business rises and the increasing cost of living pushes customers away.

But the sharp increase simply means that SMEs are back to their pre-pandemic cash levels. Before Covid, in 2019, the proportion of businesses without a week of cash in their accounts was 34%.

UK small and medium-sized enterprises have more debt than they did before the Covid pandemic

Bank of England

During the crisis more than one million companies took out small business loans that were backed by the Government.

Many of these were simply taken out as a precaution, and sat in bank accounts for months, untouched.

“UK small and medium-sized enterprises have more debt than they did before the Covid pandemic,” the Bank said in its Financial Stability Report on Tuesday.

“However, the vast majority of new debt was issued at relatively low (interest) rates that tended to be fixed for six years or longer.”

Despite this, many companies are still vulnerable to changes in the interest rates. At least 70% of the value of outstanding loans taken by SMEs is still normal loans.

The interest that a large proportion of these companies pay goes up within a year when the Bank increases its interest rates.

Rates have already risen to the highest point since the financial crisis, and are widely expected to rise further.

The Bank also said that large corporations will come under pressure.

At the end of 2021 36% had low interest coverage ratios (ICRs) – a measure of how easily a company can pay the interest on its loans. Having a low ICR means that the company might struggle more.

This figure is expected to increase as interest rates rise. In some sectors, especially those highly exposed to energy or fuel prices, earnings could drop by as much as a third, even if companies raise their prices in response.

The number of large UK companies with low ICR scores could rise to 46% if interest rates go up in line with market expectations. Between the financial crisis and Covid-19, the score averaged 39%, the Bank said.

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