The Cost of Doing Business

Few can deny that the aftermath of COVID-19 and the escalation of the Russo-Ukrainian War were the principal causes of heightened inflation and the resulting cost-of-living crisis we face today. Few, however, have cited the extraordinary rates at which companies refinanced themselves during COVID as a heavily contributing factor.

With non-essential brick-and-mortar businesses forced to shut up shop during lockdowns, there was a clear distinction in performance between businesses with eCommerce capabilities and those without. Between February 2020 and February 2021, online sales increased from 19.7% to 37.5% of all retail sales – digitally-savvy businesses were altogether in a much happier state than their less future-proofed counterparts. Private equity firms were also in a good spot. With enough businesses performing sufficiently well to make investment worthwhile and interest rates hovering at nearly an all-time low, they splashed the cash and UK PE deals increased from 1,117 in 2020 to 1,545 in 2021. Equally, high-performing businesses which did not obtain equity financing flocked en masse to purchase debt of their own – in 2022 in the UK, SMEs took out £65.1 billion in debt financing, the second highest level in over a decade. On the other side of the equation, businesses which were performing badly needed to stay afloat. The government’s three business interruption and bounce-back loan schemes proved popular, with over £79 billion of debt being approved between March 2020 and March 2021.

By 2022, all seemed well and good – the FTSE 100 was booming, private equity was thriving, many businesses which may have otherwise collapsed had stayed afloat and GDP had overtaken pre-pandemic figures. But global inflation levels were starting to creep up, Putin was flexing his muscles and Liz Truss’s mini-budget was on the horizon. It became clear that interest rates would not merely return to ‘normal’ levels and instead they rose to their highest levels since 2009. Loan repayments and input costs spiralled, and the consumer has literally paid the price. The massive spike in CFO hiring over the past twelve months suggests a level of burn-out we have rarely seen, as companies struggled to refinance.

So, should businesses have had a more cautious outlook with regards to their financing activities? Did the Bank of England mistakenly set a monetary policy that incentivised companies to indebt themselves? Possibly. Neither party could have predicted some of the external events that have shaped the last year. For consumer companies approaching the “Golden Quarter” and preparing to battle for Christmas shoppers, there is at least a hold on interest rates and signs of falling inflation. However, they are still needing to invest significantly to keep prices at competitive levels and, come the New Year, we are likely to see strong companies getting stronger and weak companies being weeded out.