SMEs resilient in spite of higher debt costs, BOE finds
While the majority of SMEs have shown resilience in a higher interest rate environment, a tail of vulnerable companies are seeing increased debt-servicing costs, Bank of England analysis has found.
The Bank calculated proxy debt-servicing ratios (DSRs), which measure a business’s available cash flow to pay debt obligations, based on a sample of around two million SMEs. It used Experian’s data for the analysis. A high DSR indicates that a business is more likely to have difficulty paying their debt and could be at a higher risk of default.
The analysis included SMEs which used the government-backed Bounce Back Loan Scheme (BBLS) during the pandemic. This scheme provided fixed rate loans, which means these SMEs have not been hit with higher interest rates.
However, more than 80 per cent of commercial loans to SMEs are floating rate, which means they will have been affected by higher interest payments.
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Over the past year, the Bank found DSRs for the median SME for both floating rate and BBLS loans were broadly unchanged. Higher interest payments were offset by rising earnings.
However, a small group of vulnerable companies with floating rate notes – in the 75th and 95th percentiles – saw their DSRs increase by 1.6 per cent and 6.8 per cent respectively since October 2022. This was down to higher floating rate debt payments, although the Bank noted there has been an upward trend since 2019 in the 95th percentile of SMEs.
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For SMEs which used the BBLS, at the 75th percentile DSRs showed little change. However at the 95th percentile, DSRs rose as a result of falling earnings.
When BBLS and floating rate loans were taken together, the Bank found a significant pick-up in DSRs in the hospitality, construction, retail, transport and professional services industries over the past two years. It put this down to their sensitivity to the business cycle.
It also noted that the proportion of SMEs in arrears on loan repayments has risen from a low of 0.9 per cent in February 2023 to 1.2 per cent for floating-rate loans and remains high at around 5 per cent for BBLS loans, according to November 2023 data.
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