News

May 10, 2011

Demand for credit falls as payment defaults rise

Demand for loans fell sharply among small firms in the first quarter of 2011 – and the number of defaulted repayments went up.

The Bank of England’s (BoE) quarterly Credit Conditions Survey, based on feedback from bank and non-bank lenders, also found that credit availability to small firms fell in the same period – despite a Government agreement with the four biggest UK banks to increase lending to small and medium-sized businesses by 15 per cent to £76 billion this year.

According to the BoE report, the situation for small firms from January to March contrasted strongly with that for medium-sized and larger businesses, both of which saw an overall improvement in credit demand and availability.

“Lenders attributed the fall in small-business demand to seasonal and weather-related factors as well as heightened uncertainty surrounding the effects of the fiscal consolidation,” said the report. Nevertheless, lenders expected the demand for credit from small businesses to rise sharply in the next quarter.

Separate figures from PricewaterhouseCoopers (PwC) show that insolvency rates among small firms have fallen slightly year-on-year. According to PwC, 3,657 small firms became insolvent in the first quarter of 2011, compared to 3,829 for 2010.

Some experts have pointed out that the combination of rising defaults on repayments, but falling insolvencies, implies that businesses are walking away from their debts rather than go through a potentially costly insolvency.

“I see a lot of evidence of that on business forums, where the main debt is either to HMRC or director’s loans,” said Elaine Clark, founder of Cheap Accounting. “I’m talking about very small businesses, but they’re limited companies – they’re saying, ‘I can’t pay this, it’s the debt of a limited company so HMRC is going to have to apply for a wind-up order’.

“There’s no recourse against them as a director,” Clark added. “Why would HMRC invest time and money applying for a wind-up order on a limited company for which there are no assets?”

Clark pointed out that most creditors would be sympathetic to businesses that could show a solid business plan and evidence of incoming sales or new contracts. “It’s not actually in creditors’ interest to put people out of work,” she said. “The problem is that in a lot of these situations, there’s no way these companies will turn themselves around; that’s the crux of the matter.”

• Four in ten small firms rely on credit cards