What you need to know

As the COVID-19 pandemic causes massive disruption to all business, the largest impact has been seen in SMEs, with anecdotal evidence suggesting that 80% of all UK SMEs have been affected in some way. As a result, many have been forced to postpone growth plans, lay off staff or face outright insolvency.

The national lockdown announced on 4 January 2021, and which legally came into force on 6 January, will only add extra financial pressure to businesses that are struggling and lenders will be greatly required once again.

Commercial borrowing levels have traditionally followed business cycles. During ‘boom’ years, businesses are eager to borrow to finance capital investments in new equipment and facilities. However, in the current pandemic-ravaged business climate, business borrowing levels have risen due to the need for survival rather than the need to expand to meet growing customer demand.

While the ‘big five’ banks still provide the vast majority of lending to SMEs, new disruptive players are entering the market and are starting to change the lending landscape. New digital-only lenders have changed how loans are offered and the ‘big five’ banks have reacted to this by investing in digital lending processes for their own customers.

Therefore, banks have started to adopt more of a fintech mind-set with most aware of the need to test and apply new operating model prototypes that increase lending flexibility and agility. However, adoption of new models still tends to be focused in the B2C area, with these new methods needing to be shifted into the B2B sector, where many small businesses will require quick finance in order to weather the current economic storm.

Key issues covered in this Report

  • The impact of COVID-19 on commercial borrowing and how lenders and borrowers alike will react to the new market conditions.

  • How the commercial borrowing market will adapt to the post-COVID-19 environment.

  • The value of the market in 2020 and beyond.

COVID-19: Market context

This update on the impact that COVID-19 is having on the commercial borrowing industry was prepared on 6 January 2021 when the new nationwide lockdown came into force.

The first COVID-19 cases were confirmed in the UK at the end of January 2020, with a small number of cases in February. As the case level rose, the government ordered the closure of non-essential stores on 20 March 2020.

A wider lockdown requiring people to stay at home except for essential shopping, exercise and work ‘if absolutely necessary’ followed on 23 March. It wasn’t until 15 June that non-essential stores were allowed to re-open, followed by pubs, restaurants, hotels and hairdressers on 4 July, and many beauty businesses on 13 July.

By September 2020, it had become clear that the UK was at the start of a second wave, and social distancing measures were intensified. Continued increases in infection numbers led to Wales implementing a two-week national lockdown from 19 October, England announcing a full month-long lockdown from 5 November, and Scotland introducing a new five-level system of coronavirus restrictions.

Despite these restrictions, however, case numbers continued to increase, and after a brief relaxation for Christmas Day, a full national lockdown was announced on the evening of 4 January 2021 and made law from 6 January. There is no defined end date for the lockdown: the legislation presented to Parliament extends to 31 March, but the Prime Minister Boris Johnson has said that he hopes that schools will be able to re-open after February half term.

Meanwhile, the UK’s vaccination programme started on 8 December 2020 and with both the Pfizer-BioNTech and the Oxford-AstraZenica vaccines licenced for use in the UK, the government aims to offer a vaccine to 15 million people by mid-February.

Impact of the January 2021 lockdown and the vaccination rollout

Much of this Report was prepared in December 2020, before the announcement of the January lockdown, and when the extent of the vaccine rollout was less clear.

However, the content was reassessed and, where necessary, adjusted on 6 January 2021, in order to ensure that our analysis and our forecast expectations still hold true.

Our core assumptions on the path of the pandemic had always included an expectation of severe disruption to markets and consumers’ lifestyles well into 2021, with a strong likelihood that the virus would still be with us even into 2022. Although the second wave of infections and subsequent lockdown puts us towards the negative end of our initial expectations, these developments are still broadly consistent with our previous assumptions.

Similarly, Mintel had factored in the likelihood that an effective vaccine would be available from early- to-mid 2021. The licensing of the Pfizer-BioNTech and Oxford-AstraZenica vaccines puts us slightly ahead of that assumption, but the challenge associated with rolling out a new vaccination programme to millions of people means that our previous assumptions are still broadly consistent with the new reality.

Economic and other assumptions

Mintel’s economic assumptions are based on the Office for Budget Responsibility’s central scenario included in its November 2020 Fiscal Sustainability Report. The scenario suggests that UK GDP will have fallen by 11.3% in 2020, recovering by 5.5% in 2021, and 6.6% in 2022. GDP is not expected to return to pre-COVID levels until the fourth quarter of 2022. The central scenario has unemployment peaking at 7.5% in Q2 2021.

The current uncertainty means that there is wide variation on the range of forecasts, however, and this is reflected in the OBR’s own scenarios. In its upside scenario, economic activity returns to pre-COVID-19 levels by Q4 2021. Its more negative scenario, by contrast, would mean that GDP does not recover until Q3 2024.

The second wave of infections and subsequent lockdown means that the short-term prospects for the country are consistent with the OBR’s negative scenario, but this needs to be balanced against the fact that the vaccine rollout is ahead of even the OBR’s central scenario. Medium- to long-term, then, we are still basing our forecasts and market analysis on the OBR’s central economic scenario.

Products covered in this Report

Commercial borrowing is a term used to describe a funding arrangement that a business can set up with a financial institution, which enables it to fund capital expenditures or other operations it would otherwise be unable to afford.

Commercial lending includes commercial property (real estate) mortgages, loans used to purchase buildings, equipment lending, loans secured by accounts receivable, and loans intended for expansion and other corporate purposes.

The following three sectors best highlight the development of the commercial borrowing industry and are also quantified in this report:

  • Commercial property (real estate) finance

  • SME finance

  • Alternative finance.

Lending is defined by the Bank of England as “loans and advances (including overdrafts and claims made under sale and repurchase agreements) and finance leases granted to non-financial businesses, in all currencies”.

Data on gross flows of lending – meaning flows of new lending to and repayments of lending by businesses – are defined with respect to loans excluding overdrafts. Overdrafts are excluded from the definition of gross lending flows because the concept is difficult to define sensibly for credit products with short-term revolving characteristics.

Gross flows of lending and repayments, and thus net lending, exclude the effects of write-offs, revaluation effects and loan transfers.

For non-financial businesses, amounts outstanding of loans (excluding overdrafts) and overdrafts are measured exclusive of accruing interest payable.

Gross lending and repayment flows are measured after the application of any interest charges to loan accounts. This means, for example, that gross lending data includes the application of any ‘capitalised interest’ and repayments data is measured after the deduction of any interest charged to the account.

Other terms used in this report include:

  • Accounts receivable – money owed by customers to another entity, which has not yet been paid for. Receivables tend to come in the form of operating lines of credit and are usually due within a short time period.

  • Asset-based finance – a method of providing structured working capital and term loans that are secured by accounts receivable, inventory, machinery, equipment and/or property.

  • Bad debt – a debt that is not collectible and is effectively worthless to the creditor. This tends to occur after all attempts have been made to collect on the debt, and is usually a product of the debtor going into bankruptcy or where the additional cost of pursuing the debt outweighs the amount the creditor would collect.

  • Commercial credit – a pre-approved amount of money issued by a bank, or other lender, to a company that can be accessed by the borrowing company at any time to help meet various financial obligations.

  • Crowdfunding – a way of raising finance by asking a large number of people or business owners for a small amount of money. Debt crowdfunding involves investors receiving their money back with interest (also known as peer-to-peer lending). Equity crowdfunding involves investing in an opportunity in exchange for shares or a small stake in the business, project or venture.

  • Effective interest rate – the weighted average of all interest rates across each type of deposit or loan account held by all clients in an economic sector.

  • Hire purchase – a system in which a company pays for an item or service in regular instalments, while having the use of the specified item or service.

  • Insolvency – when a business can no longer meet its financial obligations with a lender or lenders as debts become due.

  • Invoice trading – the process in which companies, particularly SMEs, auction their invoices online as a way to gain quick access to money that would otherwise be tied up.

  • Liquidation – when a business or firm is terminated or made bankrupt, its assets are sold and the proceeds pay creditors.

  • Loan write-offs – after a period of time, as dictated by regulations, has passed for banks or other lending institutions to collect ‘bad debt’, the institution must ‘write off’ the loan and expect the debt to remain unpaid.

  • M4 lending – sterling lending by MFIs to the M4 private sector, including advances, acceptances, reverse repos, investments and holdings of short-term paper.

  • Monetary financial institutions (MFIs) loans to non-financial businesses (NFBs) – lending in all currencies to all UK non-financial businesses classified to non-financial industry sectors.

  • (Net) Rate of return – the gain or loss on a loan over a specified period, expressed as a percentage increase over the initial loan amount.

  • Non-financial corporations (NFCs) – corporations that produce goods and services for the market and do not deal in financial assets and liabilities as a primary activity.

  • Peer-to-peer business lending – a method of debt financing that enables companies to borrow and lend money without the use of an official financial institution as an intermediary.

  • Syndicated loan – a loan offered by a syndicate of lenders, which work together to provide finance for a borrower. The loan may involve fixed amounts, a credit line or a combination of the two. Interest rates can be fixed for the term of the loan or floating – based on a benchmark rate, such as the London Interbank Offered Rate (LIBOR).

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