Company Insolvencies at 32-year Low Thanks to Covid Loans

finance

In Q1 of 2021, statistics report that company insolvencies in England and Wales were at their lowest level in over 30 minutes. Thanks to government support during the coronavirus pandemic, companies were able to stay afloat.

Britain was set for disaster in 2020, suffering its sharpest drop in economic output in over three centuries; however, thanks to more than £75 billion in government loans, companies were able to avoid bankruptcy and stay financially stable.

The number of businesses declared as insolvent in the first quarter of 2021 was 2,384, down from 3,053 in the final quarter of 2020. These numbers are the lowest reported since Q1 of 2011.

How Many Insolvencies Are There Annually in the UK?

In 2020, there were 111,424 reported individual insolvencies, down 9% year-on-year from 2019. Of this, the largest proportion came from individual voluntary arrangements (IVAs) (78,478). 

The rest was made up of debt relief orders (DROs) (20,321) and bankruptcies (12,625). The DROs and bankruptcies were the lowest they had been for 11 years and 30 years, respectively.

In a typical year, there is an average of between 15,000 and 17,000 bankruptcies annually. For DROs, this figure is around 24,000 and 28,000 per year. IVAs, on the other hand, have been increasingly steady year-on-year by around 10-20%; this time, there was only an increase of 1%. 

Government Schemes: Furlough and Bounce Back Loans

The UK government has been the key player in this initiative, providing a much needed lifeline for thousands of companies.

Thousands have relied on the furlough scheme over the past year, the scheme which has been supplementing 80% of workers’ wages whilst they are unable to work. With the government paying up to £2,500 monthly per worker, companies have saved thousands over the last year.

HMRC statistics show that at the peak of the furlough scheme, there were 8.9 million employments furloughed. The furlough scheme has already been extended until the end of September 2021 but from July 2021 will start to contribute towards the cost proportionally. 

Bounce Back Loans

Another government-funded scheme that has saved thousands from bankruptcy is the Bounce Back Loan Scheme (BBLS). This scheme was designed to give companies quick access to funds with a year interest-free. A lender could offer a six-year term loan from £2,000 up to a quarter of a business’ turnover.

During the coronavirus pandemic, the BBLS supported thousands of UK-based businesses whose cashflow was being negatively disrupted as a result of the coronavirus pandemic. Offering up to £50,000 in finance, the scheme promised next day payments and loans with a year of zero interest.

Around 1.4 million businesses took out Bounce Back Loans, representing a £45 billion bail out from the UK government.

Repayment of Bounce Back Loans

Now, the bounce back loans are due for repayment although given the current circumstances, there are still many companies who are unable to pay. However, the government has offered flexible repayment.

Those who borrowed Bounce Back Loans will now have the option to adjust their repayments based on the circumstances of the company. The chancellor has already offered the option of an additional six months for repayments. 

In addition to the six-month window, a ‘Pay as You Grow’ scheme has been introduced and is available for over 1.4 million businesses. Through this, companies can pause repayments, delay their payments until 18 months after they take out the loan or extend the length of their loans from six to ten years.

David Beard of leading price comparison website, Lending Expert commented:
 
“I imagine the UK banks would have realised that around 10-20% of customers were going to have trouble repaying. This is very common across all types of loans even when you have carried out sufficient credit and affordability checks.”
“We cannot ignore that covid has been very challenging for a lot of businesses, specifically in retail, hotels, leisure and hospitality, and unfortunately not even loan amounts of £50,000 will be sufficient to maintain a healthy cash flow.”
“However, millions of companies would have benefitted from the initial injection in cash which would have helped to pay their suppliers and employees and we cannot deny the short term benefits that this may have had on the economy. And now with covid restrictions easing, the economy is going to see a recovery, so repayment rates should be strong, even if some take a little longer to repay than others.”

Other Companies Saved from Bankruptcy

In summer 2020, the Bank of England (BoE) also released a list of companies who had benefited from its Coronavirus Corporate Financing Facility (CCFF). The 53 companies collectively received over £16 billion of loans, with extremely low rates.

The loans were available for large companies who were, prior to the coronavirus pandemic, financially healthy but who were suffering due to the situation. Although the scheme was funded by the Bank of England, companies outside of the UK were also eligible.

All sectors benefited from these loans but some of the largest beneficiaries were, unsurprisingly, from the aviation, automotive and retail sectors. Big names include Westfield shopping mall owner, EasyJet and Nissan who all received bailouts of £600 million courtesy of the scheme.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.