# What do two million accounts tell us about the impact of Covid-19 on small businesses?

James Hurley, Sudipto Karmakar, Elena Markoska, Eryk Walczak and Danny Walker

This post is the second of a series of posts about the Covid-19 pandemic and its impact on business activity.

Covid-19 led to a sharp reduction in economic activity in the UK. As the shock was playing out, small and medium-sized businesses (SMEs) were expected to be more exposed than larger businesses. But until now, we have not had the data to analyse the impact on SMEs. In a recent Staff Working Paper we use a new data set containing monthly information on the current accounts of two million UK SMEs. We show that the average SME saw a very large drop in turnover growth and that the crisis played out very differently for different types of SMEs. The youngest SMEs in consumer-facing sectors in Scotland and London were hit hardest.

SMEs are important and have been hit hard by Covid-19

There are 6 million SMEs in the UK, which account for around half of UK economic activity and more than half of employment. They rely heavily on the banking system for their financing and UK banks are heavily exposed to them. Given that SMEs are more likely to operate in in sectors like hospitality and arts and recreation, Covid-19 has hit them particularly hard. They have also been the main beneficiaries of the biggest government support schemes, such as the Coronavirus Job Retention Scheme (CJRS) and the Bounce Back Loan Scheme (BBLS).

But there have been limited data on SME performance through the crisis

Beyond national accounts aggregates and small-scale surveys, data on how SMEs have performed through the Covid-19 crisis have been sparse. The academic literature has used survey data with small sample sizes, private sector data with larger sample sizes but low representativeness or banking sector data that explicitly excludes small businesses. The ONS introduced a timely business survey in the UK but responses are skewed towards larger businesses.

We use a new data set covering 2 million SME bank accounts

To help to address these limitations, we use a novel data set with detailed monthly information on all UK SME accounts held with nine major banking groups, covering current accounts and bank debt of various forms. The data are provided confidentially to the Bank of England via Experian, a private sector information services company, on a monthly basis. The new data set covers almost two million businesses, which gives us near universal coverage of limited company SMEs in the UK. It contains monthly information on account balances and total transactions. We are not aware of any comparable timely information on SME performance in the UK, even on an aggregate basis, although there are some experimental statistics in the US.

We analyse a measure of turnover proxied by total current account inflows, and costs proxied by total outflows. To strip out seasonality we compute a year on year growth rate that takes into account entry and exit. To build confidence in the data, we have run some simple comparisons to growth in GDP and aggregate corporate profits. As shown in Figure 1, the new data tracks macroeconomic aggregates relatively closely, although there are definitional differences and we would expect SMEs to perform differently to larger companies even in normal times.

Figure 1: Comparison of SME turnover growth with aggregate data

We use the new data to document a few simple facts on the impact of the Covid-19 crisis on UK SMEs.

The average UK SME saw a 30 percentage point fall in turnover growth after the pandemic took hold in 2020

Figure 2 presents coefficient estimates and 99% confidence intervals from regressions of year on year turnover and cost growth on a full set of month dummies for all months in 2020, controlling for SME fixed effects. It shows there was a large fall in turnover growth for the average SME from April 2020 onward, relative to the period before 2020, when growth was around zero on average. The average SME had not returned to its January 2020 growth rate by December 2020. Over the period as a whole, turnover growth and cost growth moved roughly in line with one another, implying that the average SME managed to offset the large reduction in turnover by reducing outgoings to maintain cash flows.

Figure 2: Estimated impact of Covid-19 on growth by month in 2020

SMEs in the sectors most exposed to social distancing saw turnover fall by much more than others

Figure 3 shows how the average impact varied across SMEs that operate in different sectors of the economy, based on interaction terms that we included in the regressions. The average SME in the Arts and Recreation sector saw more than a 40 percentage point reduction in turnover growth year on year, compared to only around a 10 percentage point reduction for the average SME in the Agriculture sector. We also created a dummy variable that identifies SMEs that operate in ‘social sectors’, which captures those that are most exposed to social distancing. SMEs in those sectors saw lower turnover growth and relatively smaller reductions in costs than SMEs that were less exposed to Covid-19.

Figure 3: Estimated impact of Covid-19 on growth by sector

There were some regional differences in the scale of the crisis, although much less than for sectors

At one end of the spectrum, the average SME in Scotland or London faced around a 35 percentage point reduction in turnover growth over the April 2020 to December 2020 period compared to the period before the shock. At the other end, the average SME in Northern Ireland faced around a 25 percentage point reduction. There is also some evidence that the turnover shock was slightly more severe in the most affluent parts of the country, where incomes and employment levels are highest, although this effect appears to be small. Data for the US shows a similar picture. This could be because higher income people cut their spending by more than lower income people.

Figure 4: Estimated impact of Covid-19 on growth by region

Younger SMEs saw bigger reductions in turnover growth than older SMEs but they managed to reduce their costs by more

The youngest SMEs in the bottom decile of the age distribution faced around a 45 percentage point reduction in turnover growth relative to the period before the shock. The SMEs in the top decile of the distribution, which are more than 17 years old on average, faced only a 20 percentage point reduction in turnover growth. The gap between the turnover and costs dots on the chart – which can be interpreted as the cash flow impact for the average SME in the category – shows that the youngest SMEs, which are under 2 years old, appear to have had the smallest cash flow hits in relative terms.

Figure 5: Estimated impact of Covid-19 on growth by firm age decile

The very smallest SMEs had slightly less severe reductions in turnover growth

We have used historical data on average annual turnover for each SME to identify smaller and larger SMEs. The smallest SMEs, with annual turnover of less than £100,000, appear to have had the smallest impact on turnover growth during the Covid shock. The largest SMEs have had the largest negative impact, although there are relatively few of these in our data set. The second most severely affected group of SMEs are those in the £100,000 to £1 million turnover bracket.

SMEs with around average turnover hits from Covid were most likely to take out government-guaranteed BBLS loans, along with those in the North and in consumer-facing sectors

We know from aggregate data that around one in four SMEs raised finance through the BBLS government-guaranteed loan scheme, which offered low interest loans of up to £50,000 to all businesses in the UK. In the new data set we can identify borrowing under the scheme, which allows us to analyse the performance of the SMEs that took out government-guaranteed loans. This reveals an inversed U-shape, where the firms in the bottom and top deciles of the growth distribution in 2020 were the least likely to take out BBLS loans. The sectors which were most directly impacted by the lockdowns, namely hospitality and transport, as well as those in the retail sector, were the most likely to have used BBLS. The smallest SMEs, as measured based on their 2019 turnover, were least likely to use the scheme, closely followed by very large SMEs. Firms in the North were the most likely to have taken a BBLS loan, whereas those in Northern Ireland were the least likely. We also found a linear effect of age, with the oldest companies least likely to use the BBLS.

Figure 6: Estimated relationship between turnover growth in 2020 and probability of taking out a BBLS loan

The data we have introduced in this post should be useful for further monitoring and research as we emerge from the Covid-19 crisis

The Covid-19 crisis significantly reduced turnover for the average SME in the UK and there was material heterogeneity across SMEs, with younger SMEs in consumer-facing sectors hardest hit. But cash flows did not decline on average and many SMEs managed to raise funds through the BBLS scheme to help to offset the impacts of the crisis. The data we use in this post will be useful for further monitoring and research on the performance of UK SMEs as we emerge from the Covid-19 crisis.

Appendix: Regression equation used to produce the charts

$\begin{equation}&space;turnovergrowth_{i,t}&space;=&space;\beta&space;postMarch_{i,t}*\mathbf{Z_{i,t-1}}&space;+&space;v_{i}&space;+&space;\epsilon_{i,t}&space;\end{equation}$

Where i represents an individual firm, t is a month, postMarch is a dummy that takes a value of 1 for months after March 2020, Z is a set of firm characteristics (eg sector dummies, region dummies) and v are firm fixed effects.

James Hurley and Danny Walker work in the Bank’s Macro-financial Risks Division, Sudipto Karmakar works in the Bank’s Stress Testing Strategy Division and Elena Markoska and Eryk Walczak work in the Bank’s Advanced Analytics Division.