Comparing the impact of the covid pandemic on SMEs with the 2009 global financial crisis
When assessing the impact of the covid pandemic on the mid-sized and small business populations, it’s useful to draw comparisons to the global financial crisis (GFC), the most recent period of significant economic decline. A key difference is that the GFC was driven by a lack of liquidity whilst the covid pandemic has seen plentiful liquidity as government programmes have reduced costs for businesses and encouraged lending from banks and other institutions.
The GFC saw medium-sized businesses hit hard: accustomed to borrowing, but unable to borrow as normal due to the liquidity crisis faced by banks, official insolvency rates within this population increased from 1% to nearly 2.5%.
Small businesses in, comparison, registered only a tiny uptick in official insolvency rates during this period. During 2009 over 500,000 businesses ceased trading, the vast majority of them small SMEs, not reflected in the official insolvency stats. This represented around 20% of the total business population at the time and the wave of closures lagged the huge dip in GDP by around one quarter.
Within these “benign” business closures were a significant minority that were probably technically insolvent (liabilities greater than assets), but the level of debt was too low to justify creditors invoking insolvency proceedings to recover what they were owed.
In 2022, the picture is very different. Mid-sized businesses, whilst naturally impacted by the pandemic, have been able to not only maintain, but significantly improve liquidity. The range of support measures put in place by government have ensured that the 2020 GDP fall didn’t result in a corresponding tsunami of business closures as in 2009. However, this time, rather than the normal 2%, over 35% of small businesses have taken out bank loans – most of them BBLS loans.
The flexibility around BBLS loan repayments announced by the Chancellor last year – including “Pay as you Grow” means that it is unlikely that we will see as steep a rise in closures as we did in 2009. Nonetheless, the post-covid world of hybrid working will undoubtedly hit sectors that rely on the footfall of office-based staff; many of these businesses will be first time borrowers, trying to repay BBLS loans with income hit by the reduced footfall.
Whether these will result in official insolvencies will depend largely on how aggressively the banks pursue recoveries on BBLS loans, especially if the government is willing to meet the guarantee in most instances of default. It seems likely there will be a turbulent few years for small businesses, whilst mid-sized firms look well-positioned for a strong recovery.
Read the full report here.
