A leading banking expert has warned that ‘Bad Bank’ – the term coined for the specialist units within banks where businesses showing signs of financial distress are transferred – is likely to make a return to the UK’s business banking sector in the coming months.

Mark Barrie, Director of Banking and Finance in London and the South East , who specialises in Debt Advisory with accountancy firm Azets, said that the combination of increased borrowings, deferment of corporation tax, VAT, National Insurance, rent and rates will mean that thousands of businesses are unable to generate enough cash or profit to service their liabilities and therefore become no longer viable.

He said: “Towards the end of last year a number of reports were citing over half a million UK businesses were in significant distress and the likelihood is that the situation will only worsen in the near future. This highlights the scale of the financial crisis shaping up for the economy. We are shortly likely to enter a phase where traditional bank funding will become more difficult to secure. In addition, the market to re-bank a business with another mainstream lender will become incredibly difficult.

“This means that lenders will begin to divert their attention away from new lending towards managing accounts where performance has deteriorated, covenants have been breached, and lending risks have increased. All this, coupled with problems in specific sectors such as retail and hospitality means that the potential for failure is high.“

Mark went on to point out, however, that as mainstream banks reduce their inclination to lend, there will be new opportunities for alternative and specialist lenders to enter the market who will play an important role in helping businesses survive.

“Mark added, “In these exceptional times, .banks will start to move to protect and manage their own risks, which is likely to result in a marked reduction in available funding. A large number of businesses that in normal times trade quite comfortably will soon be starved of cash flow and will face severe contraction or even cease trading.

“Alternative lenders have a different approach to risk, In order to differentiate themselves. They often focus on certain sectors and can be more flexible with their lending solutions and approach, which could be helpful to businesses seeking to establish a new borrowing relationship.

“There’s no doubt that the next few months are going to be very difficult indeed for many businesses. However, it’s important that business owners are aware that there are alternative providers in the marketplace that could help them bridge financial problems that otherwise could become terminal.”