What sources of credit do UK companies rely on?

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.
Published on 24 July 2020
Our analysis shows that smaller companies are more likely to borrow from banks, while larger companies have access to alternative sources of credit, such as market-based funding.

Typically, the sources of credit that UK companies rely on depends on the size of the company.

Small and medium-sized companies tend to rely on the banking system. Larger companies borrow from banks, but may also be able to access alternative sources of credit via capital markets.

Bank lending makes up around a half of the estimated stock of outstanding debt for UK companies (Chart A).

Non-bank lenders also have a role to play, including for small and medium-sized enterprises (SMEs). Non-banks offer alternative sources of finance to SMEs, particularly in the asset finance (eg leasing and hire purchase) and supply-chain finance (eg invoice finance) markets.

Larger UK companies rely heavily on market-based funding. This is a valuable alternative to bank financing and allows companies to access credit through financial markets, rather than through the banking system. It accounted for more than half of the debt outstanding for larger UK companies in 2019.

UK companies are facing a large cash-flow deficit due to the economic impact of Covid-19. Our analysis suggests an aggregate corporate cash-flow deficit of around £140 billion from Q2 2020 to Q1 2021. We set out the assumptions underlying this estimate in the May 2020 interim Financial Stability Report.

The sources of finance that companies rely on has implications for how they deal with this cash-flow deficit. Some companies might draw upon their existing cash balances to bridge this gap, while others might seek to borrow money.

The UK banking system and capital markets both have an important role to play in providing credit to businesses to help them weather the economic disruption. However, additional debt may not be the most appropriate form of finance for some businesses because it leaves their balance sheets more leveraged.

Chart A Depending on their size, UK companies rely on different sources of credit

Estimated stock of UK private non-financial corporate sector debt

Sources: Association of British Insurers, Bank of England, Cass Commercial Real Estate Lending survey, Deloitte, Finance & Leasing Association, firm public disclosures, Integer Advisors, LCD an offering of S&P Global Market Intelligence, London Stock Exchange, ONS, Peer-to-Peer Finance Association, Eikon from Refinitiv and Bank calculations.

For detailed footnotes, see chart C.11 on page 44 of the May 2020 interim Financial Stability Report.

This post has been prepared with the help of Marek Rojicek, Leo Fernandes, Ashley Young, Varun Paul, Oliver Thew, Miriam Kurtosiova, Richard Button and David Baumslag.

This analysis was presented to the Financial Policy Committee as part of its May 2020 round.

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