Lending conditions tighten in an already squeezed market
While many businesses are still waiting for their year to really begin to catch fire, new analysis shows that those companies looking to borrow and invest might be in for a disappointing 12 months.
Bank to business lending is forecast to contract by 3.8% this year, which would be one of the largest annual falls in decades.
While growth in the market is expected to return in 2024, this might be too late for many businesses that need the money not just for expansion and investing in plant and services but those who need help making their regular repayments and meeting their debt obligations.
Demand for business borrowing is expected to weaken as companies face continued supply chain disruptions, lower earnings and high costs for servicing existing debt.
Approximately 70% of UK corporate bank loans are on variable rate terms which leave them vulnerable to continuing interest rate rises.
Inflation has fallen from a peak of 11.1% in October but remains above 10% so it was no surprise to see the Bank of England raise interest rates once more by 0.5% to an overall rate of 4% last week.
This is the tenth consecutive interest rate rise in succession in a cycle which has seen rates rise 390 basis points since December 2021, the fastest acceleration in rate rises since the 1980s.
Additionally small and medium sized businesses are more vulnerable to rises than larger companies because they are unable to insulate themselves against higher rates and because the volume of bank debt they hold has grown since 2019.
While inflation is expected to fall by as much as half by the end of the year, the immediate future will most likely see some more interest rate increases that will make borrowing and repaying debt even more expensive.
Analysts don’t expect any more rate rises as long as inflation continues to fall and the next round of speculation will focus on when they will start to be reduced although no experts or economists expect this to happen until 2024 at the earliest.
The forecasts come after the Insolvency Service confirmed that 2022 had the highest number of business insolvencies since 2009.
22,109 companies in England and Wales entered insolvency which was an annual increase of 30%.
The number of companies opting to close voluntarily through a creditors voluntary liquidation (CVL) reached its highest total since the 1960s with 18,831 cases.
Chris Horner, insolvency director with BusinessRescueExpert, thinks that the unique negative impact of historic interest rates, inflation, high energy prices and the hangover of bounce back loans was critical.
He said: “Now the final stats are available it’s clear that an insolvency dam has burst for many businesses.
“They could perhaps have weathered one or two of the external shocks but not all at once and this has proven critical.
“The number of voluntary liquidations is also a clear sign that many directors have reached the difficult but logical conclusion that their business has realistically gone as far as it can and it is easier and more efficient to close than struggle on.
“The stress is deepening and spreading to nearly every sector of the economy as falling confidence and increasingly bleak forecasts affect investment decisions, contract renewals and access to credit and borrowing for businesses.
“This might be a new year but in January alone we’ve seen big names in multiple sectors such as Byron Burger, Paperchase, Britishvolt and Flybe all go into administration.
“The best thing any director that’s worried about their business this year can do is get some professional advice as soon as they can – they might be surprised at how many options they have.”
One thing about predictions we can say with absolute certainty is that they are just that – a prediction.
Nobody knows for sure what the next few months will hold but data and experience all suggest that things are going to get tougher before they ease.
And smart directors and business owners will use the time they have right now to act rather than keep their fingers crossed.
We offer a free initial consultation for anyone who would like to find out what they can do, starting right now, to strengthen their business.
Alternatively, they might decide that they need to close their business and move onto their next professional venture. They can find out how to do that quickly and efficiently with a minimum of stress too.
We’re here to help no matter what they decide – and we can begin as soon as they get in touch.