Today sees the publication of our Q1 2020 Business Finance Review. For those under lockdown for the past 100+ days, the first quarter feels like a long time ago, but the data gives some insight into the early actions taken by businesses at the start of the Covid-19 pandemic and a few pointers on what we should be looking out for in the coming quarters.

New lending down in Q1

Our headline lending indicator showed that gross lending on loans and overdrafts headed lower for the second quarter running in the first three months of this year. We attribute this weakening to the subdued growth and fragile investment outlook for businesses in the latter part of 2019, when Brexit and politics were the main source of uncertainty.

While there was some resolution to this and, subsequently, some hope that investment plans would be reinvigorated at the turn of the year, Covid-19 events have clearly overtaken this. Nevertheless, as negotiations with the European Union rumble on, there are signs that Brexit uncertainty is back on the agenda (see, for example, the Bank of England's Decision Maker Panel survey). How a deal on the UK's future relationship with the EU shapes up in the coming months will be another thing for businesses to watch and could shape future investment and, therefore finance requirements, later this year and into next.

However, the main news in the quarter was the response to the Covid-19 pandemic and the ensuing economic downturn. Economic output shrank by almost six per cent in March alone as lockdown restrictions were introduced. Many businesses temporarily closed their doors, saw demand drop sharply, sent staff to work from home, put employees on furlough or a combination of all of these.

Flexibility and new finance

The significant turnover and cashflow impact of the pandemic was evident at the outset. Our Business Finance Review shows that at least some SMEs had a degree of flexibility in existing finance arrangements before the downturn hit - unutilised overdrafts, invoice finance facilities and deposits for example. Survey findings from UK Finance and BVA-BRDC showed that businesses first response to the crisis was to make more use of these existing arrangements to manage their operations.

That said, our data also signals a sharp increase in new borrowing approvals - primarily overdrafts; a trend that was evident in February but accelerated in March. This was ahead of the introduction of the government-backed lending schemes, such as the Coronavirus Business Interruption Loan Scheme and Bounce Back Loans. Growth in overdraft approvals was notable across all industry sectors, but especially marked in some consumer-facing service industries, such as accommodation & food service.

This signals the likely direction of travel through the second quarter and beyond. Data from HM Treasury last week showed around one million businesses had been in receipt of finance through one of the government schemes by the end of June. This is an indication of how business and the finance sector have worked together through the crisis phase of the pandemic.