As the Covid-19 outbreak continues to impact businesses of all sizes and all industries in the UK, Rishi Sunak’s announcement of a stimulus package designed to protect businesses impacted by Covid-19 has been largely welcomed. Among the announcements was that of a new temporary Coronavirus Business Interruption Loan Scheme (CBIL) which will be fulfilled through the Enterprise Finance Guarantee (EFG) and will allow SMEs to apply for support loans of up to £5 million in value.
While offering help to businesses which have been hit with cashflow difficulties or are experiencing a drop in revenue due to the outbreak, there are a number of factors which could affect the successful and efficient delivery of the loans. After speaking to a number of clients over the past few weeks, it has become obvious that there is a need for clearer communication across all the different stakeholders to ensure businesses are aware of their options. Following the announcement by the Chancellor of the Exchequer, many businesses were left with the impression the loans would be provided by the Bank of England and expected lower rates at 2-4%, however this is not the case. These are Government-backed loans which means the Government will provide lenders with a guarantee of 80 per cent on each loan (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to small and medium-sized enterprises (SMEs) and will be covering the first 12 months of interest payments.
One important element of the CBIL, which is not widely publicised, is that the majority of the guarantee limit is made of the 80% guarantee the Government is providing for individual businesses but there is also an overall portfolio default limit of 15% put on each lender. If their default rate goes above this, the Government guarantee will not support them for these losses. My understanding is that for the CBIL scheme, the portfolio limit may be increased to 20% but in the current environment this will still make lenders cautious.
In these difficult times, taking out up to £5 million of a government-backed loan could be an invaluable lifeline for many businesses, so apart from clear communication, there is a need for these loans to become available to business owners as quickly and efficiently as possible. The current infrastructure of the EFG panel begs the question whether it will be able to offer the loans quickly enough to businesses already struggling. The panel has 40 lenders on the panel consisting of a mix of High Street banks, specialist lenders (i.e. specialising only in asset finance or invoice finance) and small regional funders. All these lenders have different ways of working and time frames. Cheaper loan rates and arrangement fees come from the High Street banks but the process is slower and will require much more paperwork. Some of the bankers we’ve spoken to have already said that they were waiting for the paperwork to become available before they are able to start the process, adding to the long waiting time for businesses. The alternative is one of the private loan lenders on the panel who can move much more quickly but can charge arrangement fees of up to 4-6% and interest rates of circa 17%. This has led some businesses owners to think they can take these loans out, have the interest paid for the first 12 months and then refinance following the 12-month period when the market conditions have improved.
Another possible issue could be whether the EFG infrastructure can support the volume of loans which will need to be processed over the coming months. Statistics show that over the last few years the EFG has lent about £50m per quarter with the partly state-owned RBS/NatWest accounting for the majority of this and from anecdotal conversations we’ve had in the past, bank appetite for the old EFG scheme has varied from not just bank to bank but even from branch to branch. Perhaps many bankers see it as a scheme that has disproportionate risks for them and certainly there is a lot of extra paperwork for not a great return.
If this scheme is to succeed, the system that’s already in place needs to evolve and this can only come from introducing established FinTech and Crowdfunding lenders such as Funding Circle, Lending Crowd, ESME or MarketFinance to the panel. These lenders are experienced in processing unsecured loan applications quickly, their arrangement fees vary from 3-6% and interest rates are generally lower than the 17% or so charged by existing EFG lenders so this could unleash some much-needed capital more quickly. Having worked in the industry for many years, I have observed the way they work and the numbers show they have the infrastructure required already in place. For example, Funding Circle alone processes approximately £120m of loans per month and so would have a huge impact on the scheme.
While I believe this scheme will provide much needed help to businesses over the coming months, I believe it needs to be refined and fine-tuned to suit the quick turnaround times and volume required in order to stand a chance. We have had calls from businesses which have seen their entire revenue disappear for the next three to six months so it’s essential for the Government to rethink the steps they need to take to create the greater scale needed at this moment.
Sean O’Farrell is an entrepreneur and Managing Director of long-established finance brokerage Choice Business Loans which helps businesses access traditional forms of finance, as well as alternative ways of raising finance such as peer-to-peer lending, crowdfunding and merchant cash advances.