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Sat September 25 2021

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SMEs hit hardest by post-Carillion lending cuts

20 Nov 18 SMEs have ‘borne the brunt’ of Carillion’s insolvency according to a new study by specialist debt adviser Hadrian’s Wall Capital (HWC).

Bank lending to small and medium-sized construction businesses has fallen by almost £1.2 billion following the collapse of Carillion, according to the company’s analysis of data from the Bank of England.

Bank lending to SME construction has fallen by 7%, whilst loans to large construction fell just 3.5%, said HWC. Lending to SME construction businesses dropped to £15.46bn at end of September 2018, down from £16.63bn at the same time in 2017. This is a far sharper fall than in lending to large construction businesses, which reduced to £17.21bn from £17.83bn over the same period.

Following Carillion’s liquidation, many of its subcontractors lost significant amounts of work and were left with substantial bad debts, encouraging lenders to become more cautious about extending credit to smaller businesses in the sector, said HWC.

CEO Marc Bajer said: “The failure of Carillion had a direct impact on the construction businesses who might have been Carillion suppliers or subcontractors, which is further exacerbated by a reduction in available finance to the sector which makes trading very tough for these businesses. For many of those smaller construction businesses, that reduction in lending could hurt their long-term growth prospects. Hiring staff, purchasing machinery, financing new and existing projects – all of these are much harder to do if finance is not readily available.”

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The effects of Carillion’s liquidation may already have started to push more construction businesses into insolvency. Data from the Insolvency Service shows that the insolvency of construction businesses rose 11% in the year to 30 September, up to 2,924 from 2,645 the previous year.

The impact of the Carillion insolvency may also have been compounded by the impact of Brexit uncertainty, said HWC. With house prices already falling, particularly in London, the prospect of an even bigger decline may be making banks even more reluctant to lend to construction businesses.

Only 16% of lending to UK SMEs is done on a fixed rate basis. The Bank of England is forecast to increase rates again within the coming months and so small businesses with traditional floating rate borrowing arrangements will see their costs of borrowing rise, reducing their ability to invest in growth, warned HWC.

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