More than 95% of UK businesses are small and medium-sized enterprises with fewer than 250 employees. They account for around 45% of total revenues and around 60% of private sector employment. So they make a large contribution to the UK economy.
The Covid-19 shock has reduced cash flows for many companies. Smaller companies are more likely than larger companies to operate in sectors that have been most affected by the shock (Chart A), such as accommodation and food, arts and recreation, and construction.
Chart A: Smaller companies are more likely to operate in sectors vulnerable to Covid-19
Proportion of total assets among smaller and larger companies accounted for by firms operating in each sector, ordered by size of expected turnover shock
Smaller companies report basic balance sheet information at Companies House but many are not legally obliged to file profit and loss accounts, unlike larger companies. This makes it difficult to analyse their profitability and cash flows.
To address data limitations, we used machine learning to model the cash flows of smaller companies. This suggested that fiscal policy would provide material support but that they could face an aggregate cash-flow deficit this year of around £40-£70 billion, creating a need for liquidity.
Typically, smaller companies have fewer external financing options available to them than larger companies. But government-guaranteed loan schemes – particularly the Bounce Back Loan Scheme – have materially increased the provision of lending to these companies. More than a million loans have been extended under the scheme.
Many smaller companies operate with very little debt, but there is a sizable number of highly indebted smaller companies (Chart B).
Smaller companies also hold a higher proportion of their assets in cash than larger companies (Chart B). Some of them might be relatively well placed to weather the impact of the shock. But more work is needed to assess the scale of potential insolvencies that might result from lower cash flows and new debt.
The Financial Policy Committee will continue to develop its analysis and monitor developments in the financing of smaller companies over the coming months.
This post has been prepared with the help of James Hurley, Sarah Venables and Danny Walker.
This analysis was presented to the Monetary Policy and Financial Policy Committees as part of their August 2020 rounds. It also featured in the August 2020 Financial Stability Report and a separate technical annex.
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