Businesses across the UK are becoming increasingly hesitant to borrow, with new research showing that rising financial distress among peers is driving this caution. Data released this week by the British Business Bank reveals that many small and medium-sized enterprises (SMEs) are now more reluctant to take on new debt, with fewer than half accessing finance in the past year.
This caution comes as the financial stability of many businesses has worsened. According to the latest “red flag” study from Begbies Traynor, more than 650,000 businesses ended the year in significant financial distress, marking a sharp increase from the previous year. The number of businesses facing critical distress surged by 50 percent to nearly 47,000, with the construction and support services sectors seeing the highest levels of strain.
David Hopkins, a partner in restructuring and turnaround at Begbies in Manchester, warned that business owners need to act swiftly if they notice signs of trouble. “Delays in customer payments or project starts can cause cash flow issues months later,” he said. “People often hope things will magically improve but, without real changes, the problems remain. Head-in-the-sand is never the right approach.”
For businesses already under pressure, financing options remain available, though they come with a higher price tag. Gary Burns, head of construction at MAF Finance, pointed out that funds aimed at distressed borrowers typically charge higher rates due to the increased risk. One potential solution is to release equity from assets, such as plant and machinery, although this comes with challenges, particularly in volatile sectors like construction where second-hand equipment prices fluctuate.
Refinancing through specialist lenders also offers a potential lifeline, providing businesses with options like staged or balloon payments, which can delay larger sums until later in the loan term. Some lenders are even open to seasonal or variable payment schedules to help companies manage cash flow during slower trading periods.
The British Business Bank’s findings align with what Begbies Traynor is seeing on the ground. Hopkins explained, “We’re advising more businesses looking to cut back on debt. High interest rates are putting significant pressure on those already carrying large borrowing.”
Despite the growing wariness among SMEs, alternative lenders are experiencing a surge in activity. These lenders accounted for 60 percent of the £62 billion in gross business lending last year. While they often charge higher rates due to their reliance on non-deposit-based funding, their refined risk assessment processes allow them to approve businesses that may be turned away by traditional banks.
Burns noted that, although margins on unsecured lending from alternative lenders have decreased in recent years due to increased competition, companies looking to refinance debt from the Covid-19 pandemic must remember that government guarantee schemes generally do not apply to repaying existing pandemic loans.
The Growth Guarantee Scheme, which offers a 70 percent guarantee on facilities up to £2 million, can reduce risks for lenders and lead to lower interest rates in some cases. Despite the challenging environment, SMEs with careful strategies and foresight may still find ways to manage their debt and avoid financial distress.
