“I’m not sure where it’s all going and if we will survive,” says Chris Wolfe, owner of wholesaler Southeast Flowers, pointing to the hundreds of weddings cancelled at short notice and the flowers that died on the way from Ecuador.
Last year, the thorniest problem she faced was finding enough flowers to supply a vast cathedral service: this year, it is whether to take out a government-backed emergency loan which might keep her company afloat but would be difficult to pay back.
“We are not going down without a fight, but I am not going to leave myself with huge debts and unwell in getting there,” she says. “It’s tough, but there are others worse off than us.”
Companies such as Ms Wolfe’s are now at the centre of the crisis that the British economy is set to face in the coming months, amid the slow emergence from lockdown and new fears over a second wave of the virus.
Economists warn that the UK could see more than 3m people unemployed — a level it has not witnessed since the deep recession of the 1980s. Some of these jobs will be cut by larger companies, especially as some of the furlough schemes the government put in place at the start of the pandemic begin to expire.
But more than four months after the start of lockdown, it is the small business sector that is under the most intense pressure and where many companies are being forced to consider their future.
Close to 6m small businesses employ more than 16m people in the UK, generating £2.2tn in turnover last year and often operating far from the public eye. But many are increasingly desperate as the pandemic has continued, throttling sales across the country and sucking dry their limited cash reserves, even with the gradual easing of the lockdown.
UK Finance, which represents the UK’s banking sector, found that a fifth of small firms had less than one month of cash reserves left in May. A quarter of owners had been forced to use their savings to stay solvent; almost a fifth said they were likely to cease trading or may not survive.
“It is punishing for smaller companies,” says Rafael Rozenson, founder of Vieve Drinks, a London-based maker of flavoured water. “If you are a small-business owner like a café and you are shut for four months then that’s the death of you. [Small businesses] just don’t have the contingency plans and the budget.”
The government acted decisively to try to shore up the sector, with tens of billions in guaranteed loans, grants and business rate relief offered to small companies. Coming on top of the broader array of business support such as the furlough scheme, these measures have kept the number of failing companies low. But many fear this will not last.
“It feels like the calm before the storm,” says Stephen Welton, chief executive of the Business Growth Fund, one of the UK’s biggest investors in smaller companies. He said that estimates of 3m unemployed were not unrealistic as the government winds down the schemes in the autumn.
“Small firms are the backbone of the economy. It is a more domestically focused part of the economy and the bedrock for our towns and cities, which make them socially and economically important.”
No cash buffers
“If you are out of the circle of funding in the FTSE then where do you go?” asks Elliott Peckett, the boss of Smiffys, a Lincolnshire-based fancy dress maker.
There have been few events during the lockdown that require fancy dress. In Europe, the carnival season was cancelled. World Book Day barely registered among the wannabe Harry Potters that normally flood schools. Halloween is his best hope.
“We will do whatever it takes to survive,” says Mr Peckett, who said sales dropped by more than two-thirds in April, May and June, compared with the year-ago period. He expects turnover to drop from £60m to £40m — break-even for the business after planned cost cuts — this year, with improvement next year. In the US, its major rival — the family-owned Rubie’s — has already been forced to file for Chapter 11 bankruptcy proceedings.
Mr Peckett employs 200 people, with 90 of those in the Lincolnshire town of Gainsborough, making him the second largest local employer after a supermarket. “It’s our business — a family business. What else can we do? It’s the perfect storm: the stalling economy, Brexit and coronavirus.”
UK small businesses by numbers
Turnover generated by the UK’s nearly-6m small businesses last year
Percentage of small UK firms had £5,000 or less in credit balances at the end of 2019
Volume of guaranteed loans so far taken by SMEs under the ‘bounce back’ scheme
Keith Morgan, chief executive of the British Business Bank, which administers the government-backed rescue loan schemes, said about 60 per cent of small firms had £5,000 or less in credit balances at the end of 2019. “There wasn’t a cash buffer going into the crisis,” he says.
“There is a point that every business owner can see where the numbers go negative,” says Adam Marshall, director-general of the British Chambers of Commerce. “They can only hope that demand has managed to recover by that point, otherwise it spells the end.”
But the recovery has so far proved slow and small companies do not have the luxury of being able to plan, he adds, often working month to month on costs and cash flow. A three-month loss of business can be fatal.
The damage has been concentrated on the sectors most affected by the lockdown — hospitality, retail, entertainment and leisure — but the economic shutdown has affected almost all.
Craig Beaumont, chief of external affairs at the Federation of Small Businesses, says that compared with the financial crisis, “the impact [of the pandemic] is broader, affecting the massive majority of businesses”. With redundancies set to rise this autumn, “we could see a large influx of unemployment happening of 3m-4m”.
At 3.30am on a Monday morning on March 23 — in the teeth of the pandemic — British banks received the final term sheet for the emergency loan scheme designed to rescue thousands of small businesses fast running out of money. The agreement came just hours before the scheme went live that morning.
Rishi Sunak, barely a month into the job as chancellor, had promised to do “whatever it takes” to secure the future of British businesses that had to shut their doors as the UK entered the coronavirus lockdown. Thousands of businesses would disappear without government support and millions of livelihoods were at stake.
The government had pledged £330bn in guaranteed bank loans for the entire business sector, offered interest free or on cheap terms. Alongside the furlough scheme — which has covered the wages of workers temporarily laid off — business rates and tax holidays, as well as a grant scheme, small businesses had never before seen such direct support.
The Bank of England stepped in with a £150bn term funding scheme for banks that came with additional incentives for SMEs. But it still was not enough for all types of small business.
The all-night preparations pointed to the speed at which officials and lenders were moving — Mr Sunak’s favoured phrase became to move “at pace”, according to those in the discussions. But in doing so the package of bailout measures was left with gaps that left thousands of the smallest businesses unable to access financial help, given the conditions imposed by the banks.
The chancellor, facing increasingly desperate calls for help, came up with the “bounce back” scheme — fully guaranteed small loans, with only light checks to ensure speedy delivery.
The result was an almost immediate injection of bank cash into SMEs. Companies have taken about £50bn in guaranteed loans so far. The Office for Budget Responsibility estimates that this could rise to as high as £76bn across the loan schemes alone, with about three-quarters destined for the smallest businesses in the country.
“Government doesn’t create jobs. That’s why SMEs in particular are so important as they are the ones that will be fuelling that recovery,” says Paul Scully, who serves as the government’s small business minister and was previously a small company director. “We needed to get payment in their hands as fast as possible. Small businesses aren’t as well resourced. Their focus is on the day to day — they don’t have the big teams working out their next steps.”
Omar Ali, UK financial services managing partner at EY who led work on proposals to help SMEs for lobby group TheCityUK, says the government had now become the largest “turnround” investor in small businesses.
But the emergency loans will have to be repaid.
“My balance sheet is not looking great right now as there is another loan on it,” says Nimisha Raja, founder of Nim’s Fruit Crisps, a manufacturer based in Sittingbourne, Kent. “We have been better than some as we have managed to keep going, but sales are low. So many small manufacturers like me are really suffering.”
She took a bounce back loan to help her business survive the pandemic — a godsend, she says, even as she acknowledges it is also something that would need paying back.
Small businesses had entered the pandemic with debt more than twice matched by cash and deposits, according to UK Finance. But the bailout schemes have left the SME economy — traditionally loath to engage much with banks and outside equity — encumbered by huge amounts of debt.
One in six smaller firms now relies on government-backed debt. Typically, SMEs borrow about £4bn a month. In May, smaller companies borrowed £24bn, according to Stephen Pegge, managing director for commercial finance at UK Finance.
The number of loans approved by banks for SMEs in the second quarter was about 14 times higher than the average quarterly total of loans and overdrafts provided to SMEs in previous years.
If the OBR estimates on bounce back loans prove correct, small businesses could from next year face combined annual interest bills of more than £1bn, with higher interest payments also falling due under the other loan schemes.
The need to repay these debts will lead to widespread company failures, according to senior bank executives. The OBR said bounce back loans — which involve the most generous guarantee terms and the least stringent checks by lenders — are likely to “generate the largest fiscal costs and risks of all the schemes”.
Referring to similar programmes during the financial crisis, the OBR assumes that up to 40 per cent of bounce back loans could default. Banking executives warn that the loss rates could be even higher. Thousands of companies face being pursued by their lenders for debts they cannot afford to repay.
Yet this part of the economy also tends to attract little in the way of equity support to help repay these debts. Equity investment in SMEs was just £6.5bn in 2017, £6.9bn in 2018, and £8.5bn in 2019.
Meanwhile, FTSE 350-listed companies raised about £14bn of equity in just the three months since March, widening the gap between the prospects of the biggest and smallest businesses. With deeper pockets and ready access to cash from investors and banks, some larger companies are already returning to normal, bringing back workers from furlough and restoring pay levels.
Paul Johnson, director of the Institute for Fiscal Studies, told a Treasury select committee this month: “If we are going to keep a competitive economy going forward, it is going to be terribly important to make sure that the small and medium firms are surviving so that we do not move to that much more concentrated market structure.”
A similar outcome followed the financial crisis a decade ago, according to the Resolution Foundation, which found that the share of revenue made by the UK’s 100 largest companies increased from 19 per cent to 25 per cent. Torsten Bell, chief executive of the independent think-tank, says this crisis risks “a more extreme version of that”.
While debt is relatively evenly spread across the regions, according to bankers, most equity financing is heavily skewed to London and the south-east. This uneven debt burden, they warn, threatens Prime Minister Boris Johnson’s “levelling up” agenda.
“Any regional imbalances will be that much more pronounced. For the levelling up agenda to succeed, the government will rely on these firms and their economic activity,” says EY’s Mr Ali.
The extent of debt on the balance sheets of some of the smallest and least financially nimble businesses will be a big threat to the recovery, according to bankers and business leaders. The withdrawal of the loan schemes will not only leave them without financial assistance but saddled with interest payments for many years to come, creating “zombie” companies and hampering future growth.
TheCityUK is calling for an extensive package of further support, by converting and extending the debt. It estimates that there will be up to £100bn of government-backed debt taken by smaller businesses to survive the pandemic — of which £34bn will become unsustainable.
Other economists have argued that the government will need to convert some of this debt into equity stakes to support businesses through the crisis, or create a “bad bank” to hold debt that cannot be repaid.
Mr Sunak damped expectations this month after saying that businesses should not expect another bailout. Nonetheless, officials are acutely aware of the problems and proposals, according to the those close to talks between the Treasury and large banks.
“Without a restructuring of the debt many will just go bust,” says the Business Growth Fund’s Mr Welton, who estimates that £15bn in equity is needed to support otherwise sound and growing parts of the SME sector. “It’s an immediate and urgent requirement. The crisis is in the next few months.”
The one source of optimism is that small companies tend to rebound more quickly after a crisis. “The impact hits faster and harder but small businesses can also recover and move faster on the other side,” says Mr Marshall.
Ms Wolfe, the wholesale flower supplier, says weddings may have been cancelled almost entirely during the pandemic — but this might mean more to cater for next year.
The previous financial crash saw no dip in the number of small businesses in spite of a rise in administrations. This was because many simply started again, or were created afresh from employees made redundant. The nature of the entrepreneur is optimistic, or at least bloody minded, in their pursuit of dreams.
“I would expect to see SMEs to be squeezed but also see an increase in start-ups and the self-employed — as well as innovations,” says the FSB’s Mr Beaumont, pointing to the increase of 85,000 companies launching online ecommerce sites.
Mr Rozenson says demand for his drinks fell sharply after gyms were forced to close. But social media campaigns have boosted online sales, he adds.
Small businesses contribute an “outsized proportion of new innovation”, making their longer-term health even more critical to the country’s recovery, says UK Finance’s Mr Pegge. “The majority of new jobs that came out of the last crisis in 2009 and 2010 were created by small businesses,” says British Business Bank’s Mr Morgan. “Small firms will be equally important coming out of this crisis.”