‘Serious headwinds’ are likely to hit small businesses, warns British Business Bank

The UK economy is facing “serious headwinds” which call for additional support for small businesses, according to British Business Bank, the state-backed economic development investor.

The bank on Wednesday warned of the effects of rising interest rates, high inflation and supply chain disruption, saying conditions “remain challenging for many small businesses as they are struggling to recover from the Covid-19 pandemic.”

He added that the UK could “enter a situation where employment is reasonably high, but many people feel worse off in real terms”.

Catherine Lewis La Torre, acting chief executive, said the bank was already planning how it could help bridge any future small business funding gaps. She stressed the need for equity support for companies rather than debt, given the threat of higher interest rates.

“We are heading for rough waters,” she said. “Often times small businesses start having difficulty accessing finance. Our role will be extremely important.

The bank administered the government’s Covid-19 emergency loan guarantee schemes but has come under fire for its handling of the ‘bounce back’ loan scheme in particular, following estimates of billions of pounds in fraud.

Lewis La Torre has warned that an economic downturn is likely to lead to increased defaults on loans under pandemic programs.

She said the increase in losses would be caused by companies’ inability to repay their loans, rather than fraud, and the number of defaults would increase if economic conditions deteriorate.

Losses would be at the “upper end of the ranges” estimated by the bank, she added, if economic headwinds persist and become more severe.

The bank achieved an adjusted return of 18.2%, beating its target of 0.06%, in the year ending March 2022.

Adjusted net profit for 2021-22 was £585.5m. Profit before tax was £604.8 million, compared to £293.5 million year-on-year, mainly due to higher net gains on investment assets.

However, Lewis La Torre said pressure was already building on the valuations of the bank’s equity investment portfolio, which is marked-to-market every quarter.

Valuations for its equity programs have shown significant increases this year, but the bank warned the vast majority were unrealized returns.

“There is a risk that credit and investment losses, including significant write-downs of individual investments, could materially impact the bank’s ability to meet its return target in 2022/23.”

In total, the bank had £4.1bn of assets under management at the end of March this year, comprising £2.2bn of corporate debt funding and £1.9bn of equity financing. In the year to March 31, he invested £1.2bn.

The bank said the nature of loans within its debt portfolios, such as seed loans and peer-to-peer platform loans, often to microenterprises without collateral, made it more vulnerable to uncertainty.

“This could lead to increased credit losses within these portfolios,” he said.

Lewis La Torre earned £392,000 last year after hitting all of her incentive scheme targets, up from £295,000 in 2021. She will step down as interim CEO this week, a position she has held since September 2020, but will remain at the bank at the head of its British Patient Capital subsidiary.

Last year, the bank received £1.6 billion in new funding to expand debt and equity investment in regional start-ups. As part of this, it will for the first time establish investment funds in each of the decentralized nations.

Comments are closed.