SME directors with poor credit ratings six times more likely to default during Covid

SMEs run by directors with poor credit ratings were up to six times more likely to default during coronavirus than those with strong credit ratings, irrespective of trading performance, a new report shows.

Funding Xchange‘s Lending Monitor report for 2022 focuses on some of the countervailing trends played out during Covid and currently in the SME lending market and what it means for lenders.

It said that during Covid a “very clear picture” emerged about which businesses were likely to be resilient during the pandemic, pinpointing the importance of looking at the credit score of SME directors.

The report says: “Weak profiles show three to six times higher default rates – irrespective of the trading performance during the crisis and the sector the business operates in. 

“It is likely that with continued uncertainty and external shocks, the role of leaders in a business will be key to their resilience and success in 2022 and beyond.”

The data, which was scrutinised over a 12 month period to March 2022, is taken from credit references agencies, considering factors such as repayment of existing debt and bank account management.

Funding Xchange, which is headed up by CEO Katrin Herring said: “The purpose of this comparison is to show the direct correlation between the directors’ ability to maintain good personal finance translates into how they manage their business.”

Other key data spotlighted by Funding Xchange in the report was that it was seeing a 36 per cent year-on-year increase in gig-entrepreneurs seeking finance, through its marketplace.

It says: “Businesses born during a crisis are often more resilient. 

“Yet the shift towards gig-entrepreneurs, while making it easier to become an entrepreneur also created a large segment of marginal endeavours- often too small to be called a business that exist to replace employment or fulfil a lifestyle”.

The SME lending marketplace also highlighted that while many firms built a “leaner, more nimble” businesses during Covid, by embracing trends like remote working and moving online, these leaner firms might not be protected from the surge in energy prices, wages and inflated costs of raw materials.

“Even booming sectors, like construction, are facing a squeeze on margin that appears to be leading to a rise in insolvencies,” it said.

While saying the strength of the post-Covid economy continues to surprise, it said there was a “nervousness” that government loans, like BBLS, dolled out during Covid may still drive a wave of “delayed insolvencies”.

It added that much of the bad news is still to come and that there could be an 18 per cent increase in insolvencies in Q4 2021, compared to the Q3 2021.