The impact of the Covid pandemic on SME indebtedness

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 22 November 2021
While significantly more small and medium-sized enterprises (SMEs) are in debt than before the onset of the Covid-19 (Covid) pandemic, this debt is likely to be manageable for the majority of SMEs.

We have been analysing monthly balances of small and medium-sized enterprises (SMEs) to understand the impact of Covid on the debt positions of small companies.

Although not all SMEs are limited companies, this nevertheless gives us an insight into how much debt has been issued to SMEs as well as their ability to manage it and pay it back. This in turn helps us understand the level of risk that SME debt poses to bank capital and wider financial stability.

SME debt has increased significantly. Staff analysis of the data set shows that the share of SMEs with debt has more than doubled since the onset of the pandemic. The proportion of limited company SMEs with debt was around 45% by May 2021 (Chart A).

Chart A: The rise in SMEs with debt has been driven primarily by government-backed loan schemes, but the majority still have no debt at all

Net debt positions of UK SMEs, those with debt are split between those who have more cash than debt and those who do not (a)


  • Sources: Regulatory reporting and Bank calculations.
  • (a) The estimate of the share of firms with negative net debt positions is an upper bound as we cannot perfectly observe company-level cash values. This is because our data excludes saving accounts.

Debt-servicing pressures have also increased (Chart B).

Around a third of SMEs that have debt in this data set, have debt levels more than 10 times their cash balances, or are in their overdraft. Around a fifth have monthly debt repayments that are over 15% of their current account inflows and around 10% of businesses fall into both these buckets.

Chart B: Among the SMEs that do have debt there has been an increase of those with high debt burdens

Proportion of limited company SMEs with high debt burdens pre and post-Covid (a) (b)


  • Sources: Fame (Bureau van Dijk), regulatory reporting and Bank calculations.
  • (a) High debt to cash ratio: greater than 10x or already in overdraft.
  • (b) High monthly payments to inflows: greater than 15%.

While the risk of defaults remains, the debt is likely to be manageable for the majority of SMEs as:

  • The vast majority of new bank loans have been issued via government-backed lending schemes where terms were longer, and borrowing rates lower, than most businesses would otherwise have been able to obtain.
  • The government has also introduced pay as you grow options for those companies who may struggle to pay back the loans on the current terms.
  • Additionally, some of this lending is likely to have been precautionary. 32% of limited company SMEs who have debt in this data set currently have sufficient cash to repay all debts in full – although some may be conserving cash for future obligations such as rent and VAT arrears.

Government guarantees on this lending limit risks to bank capital. But monthly debt repayments could drag on SME profitability for the foreseeable future and reduce the amount of income available for investment.

This post was prepared with the help of James Hurley.

This analysis was presented to the Financial Policy Committee in September 2021.

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