Covid-loan defaults up 40% among mid-size firms

New analysis shows that the number of medium-sized construction firms defaulting on their Covid loans has shot up.

A total of 1,084 companies in the sector defaulted at least once on their Coronavirus Business Interruption Loan Scheme (CBILS) repayments, up to the end of June this year.

Construction now has the highest default rate of any sector of the economy, and the number increased by 40 per cent in a 12-month period, according to Price Bailey, which obtained the figures.

The data was provided to the accountancy firm by the British Business Bank via a Freedom of Information request.

Available from 2020-2021, the loans were part of business-support schemes that were meant to save companies from collapse due to the effects of lockdown.

CBILS were loans of up to £5m made available for companies whose turnover was £45m or below, with some 14,688 issued to the construction sector.

Construction News has previously revealed that more than 46,000 building firms defaulted on their smaller bounce-back loans. Data on defaults for higher-value CBILS is not released by the British Business Bank.

Construction Products Association head of research Rebecca Larkin said: “We’ve seen similar increases in insolvencies among construction firms and serves as a further indicator of the financial pressures that are impacting the construction supply chain.”

She noted that while some loans were on fixed interest rates, those who borrowed at variable rates will face significant cost increases with repayments pegged at 1-3 per cent above the Bank of England base rate, which has risen from 0.1 per cent during the pandemic to 5.25 per cent now.

“When these higher costs coincide with a plethora of other large cost increases – materials, fuel, energy, insurance, wages, other loan commitments – it’s easy to see the strain placed on contractors, particularly in a low-margin industry so reliant on cashflow,” Larkin said.

Price Bailey also carried out a survey of 700 construction industry businesses and found that 84 per cent believe they have a low insolvency risk.

The proportion is up from 77 per cent this time last year, despite insolvencies rising by nearly a fifth in the period.

Price Bailey partner Chand Chudasama said: “There is a worrying mismatch between the perception many construction industry bosses have of insolvency risk and the financial reality. This is likely to be contributing to a higher level of business failures as many of these insolvencies could possibly be avoided with better risk-management.”

Last week CN revealed that a record 44 building firms went into administration in August. The largest contractor failure since 2018, the £665m-turnover Buckingham Group, occurred in the month but was not included in the total as it was not officially registered until September.

Chudasama added: “A sizeable proportion of smaller construction businesses are finding it difficult to compete with the lower prices offered by larger businesses, with many avoiding passing on the increases for fear of tainting customer relationships. It is these businesses which are most vulnerable to cashflow problems and therefore likely to default on CBILS.”

Covid support schemes helped around 1.7 million business across all sectors and, according to government-commissioned research, saved between 150,000-500,000 businesses and between 500,000-2.9 million jobs.

An analysis by CN, published in April, revealed that at least one in four construction companies going into administration or receivership between April 2020 and January 2023 had received Covid support loans.

The majority had outstanding repayments for the loans, according to Companies House filings, with the taxpayer liable for much of the shortfall.

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