Covid lifeline loans will force firms into insolvency, Bank of England warns

Many companies that took out emergency loans during the Covid-19 pandemic are now at risk of collapse because of the same loans, the Bank of England has warned.

Businesses across the UK that would have been turned down for credit prior to Covid were able to take advantage of government-sponsored programs during pandemic times.

Many of them are now facing loan bills that they may not be able to pay off.

On Friday, the Bank of England warned that higher borrowing during the pandemic has likely put more businesses at risk.

“The rise in debt, albeit moderate overall, has likely increased the number and size of more vulnerable businesses,” it said.

“As the economy recovers and government support, including restrictions on processing orders, is removed, corporate bankruptcies are expected to increase from historically low levels,” she added.

Around 1.7 million companies have borrowed money as part of three emergency loan programs launched last year.

Many of them were tiny companies that had never borrowed money, and were desperate for money to avert instant collapse.

Although the loan terms are generous – the interest on the most widely used bounce-back loans is only 2.5% – companies still have to repay their banks.

You have up to 10 years for this and can request several periods of lower payments.

The proportion of small and medium-sized businesses seeing 15% or more of the money that comes in through the door being spent directly on paying off debt has increased six-fold since before the pandemic, the bank said.

Before Covid, 3% of companies said they would pay 15% of their inflows, now it is 18%.

The Bank of England also said in its financial stability report that the outlook for the economy was still “uncertain”.

Recently, the pace of recovery from the pandemic has slowed and inflationary pressures have increased.

Many companies report increases in costs, including for material and personnel, but also for utilities. Economy Minister Kwasi Kwarteng meets with business leaders on Friday amid a sharp rise in energy prices that has put pressure on their production lines.

The Bank’s Fiscal Policy Committee keeps the so-called countercyclical capital buffer – reserves that banks must hold ready for liquidation during a downturn – at least until December 2021.

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