BUSINESS owners are relying on overdrafts and credit cards to survive after struggling through the pandemic.

A new survey from Business West reveals the extent of the financial damage caused by the crisis to companies in the south west.

Around 40 per cent of the 550 businesses that responded to the survey reported a higher level of debt than a year ago, and a similar number (43 per cent) had six months or less of cash reserves remaining.

With pressures on firms growing after multiple lockdowns, 28 per cent of businesses seeking out finance opted to utilise the Bounce Back Loan Scheme – a government backed initiative offering favourable interest rates and flexible repayment terms, but this scheme has now ended.

The use of overdrafts and credit cards by businesses is also relatively high, at 22 per cent and 19 per cent respectively, considering that these sources of finance are more expensive than government-backed emergency finance.

They are more common than the formal government backed Coronavirus Business Interruption Loan Scheme, which only 16 per cent of respondents chose, typically larger businesses. The percentage of businesses borrowing money from family and friends was 11 per cent.

Two fifths of respondents identified credit cards as their main source of financing during the pandemic. This suggests that the self-employed who missed out on government support schemes were unable to access cheaper alternative forms of borrowing.

Business West is concerned at a potential ‘finance crunch’ coming for small businesses. With repayments starting on government backed loans and the level of debt from financial institutions and others, the burden of this debt is expected to act as a drag on business recovery.

Almost half of the participants reported a deterioration in their cashflow - the lowest point in the last three years - with responses consistent across both the services and manufacturing sectors, and almost 40 per cent of employers experienced staffing issues as a direct result of school closures.

Business West managing director Phil Smith said: "While the UK’s successful vaccination programme provides genuine light at the end of the tunnel, businesses will have to wait a little while longer before they are able to bask in the glow of a dawning economic recovery.

“There have been few winners and very many losers as a result of the pandemic, a good proportion of whom have taken on added debt to help see them through.

“In the best-case scenario, we will see pandemic related debts repaid quickly as business activity begins to ramp up and accelerate as lockdown restrictions are lifted. In the worst case, a mounting debt burden stymies business growth and proves a long-term drag on the region’s economy.

“To see businesses utilising the flexibility of the BBLS is pleasing. However, the fact that more and more businesses are turning to credit cards and overdrafts to solve cashflow issues is concerning.

"The reliance on friends and family may also be interpreted as a market failure that government and lenders would be wise in addressing.

“We are worried about small businesses and the self-employed’s access to suitable finance during the recovery period. At the end of March both BBLS and CBILS closed, and CBILS was replaced by the successor Recovery Loan Scheme.

"However, this is available via commercial bank lending and is only government guaranteed for 80 per cent of the loan.

"Our findings highlight a looming finance gap for smaller firms, given the particular finance needs of smaller businesses, who appear to not be utilising CBILS, perhaps because it is harder to access this more formal bank form of financing.

"We think further government finance schemes for these smaller firms may be needed.

“After business’ most challenging year in living memory, it goes without saying that eyes remain fixed on the roadmap out of lockdown, as only then do we have the realistic prospect of healing the wounds inflicted by the pandemic and repairing business finances.”