Why Government loans haven’t been a vaccine for SMEs and how accountants can help find an alternative

The Government-backed Covid-19 business loans are hitting the headlines again. The Chancellor has announced that companies which took out Bounce Back Loans will be able to pay them back over ten years instead of six. Although this sounds positive, it has added confusion at a time businesses and accountants crave certainty. News of the changes follows recent reports suggesting that tens of thousands of businesses, many of which are SMEs, faced collapse, as banks failed to grant repayment extensions on Covid-19 loans. Banks were refusing repayment extensions, as the Treasury would no longer commit to underwriting loans using taxpayers’ money, despite a pledge by the Chancellor last September to extend loan-payment periods on Coronavirus Business Interruption Loans (CBILS) and for the Bounce Back Loan Scheme (BBLS). At this point in time, it’s not clear if CBILS borrowers will be granted repayment extensions. This is against a backdrop of growing concerns about losses associated with COVID-19 business loans. The National Audit Office (NAO) has reported that an estimated £31bn worth of Government-backed coronavirus loans will have to be written off, due to a large proportion of loans being fraudulently acquired. Accountants’ SME clients risk paying a high price for this situation. After the financial crash in 2008 and the subsequent recession, we saw a trend of banks restricting lending to small and medium-sized businesses. SMEs were either considered too high risk or low value by traditional lenders. These businesses are now facing a similar scenario and accountants will have to help prepare their clients’ cases for borrowing from alternative sources of finance. Opportunity for alternative finance Research by Sapio shows that 85% of SMEs that began a Coronavirus Business Interruption Loan Scheme (CBILS) application are still in need of some form of financial support to address the impact of the pandemic. The reason for this is that many SMEs have found the borrowing process complex and time consuming, meaning applications are still pending, rejected or abandoned. Taking this into consideration, SMEs are looking at alternative forms of finance, with 20% already exploring other options and 65% likely to look in the future. Of these SMEs, 39% don’t know what alternative finance options are available to them, or don’t believe there is any way to raise funding for their business. Accountants have an important role in helping these businesses find finance that suits their companies and commercial objectives. Five simple steps, starting with proper consideration of the alternatives, could enable accountants to support their clients in achieving this. 1) Consider a broad range of lenders SMEs may not be aware of the alternative finance options available to them and have little understanding of what security they can leverage. If unsecured working capital loans don’t currently seem viable, consider invoice financing, asset finance or explore secured lending. Alternative lenders may take a more flexible view on security than traditional lenders. Many traditional lenders have removed themselves from industries that have been hit hard by the pandemic. Sector-specific providers could be the answer for many SMEs. Casting the net more widely will increase the chance of accessing funding, but lending applications must be thorough and well prepared. 2) Tailor the application Finance applications will face more scrutiny as the economic outlook remains uncertain. Unfortunately, most SMEs won’t have the time and experience to create a well-articulated proposal and will need close support when approaching alternative lenders. The purpose of the loan should be clear and mitigate any doubts. Many businesses will need finance to address problems caused by the pandemic; however, there are still a large number seeking to grow. These companies should be ready to convince lenders of their vision by highlighting their expertise and the reasons they can make the business a success. 3) Draw up robust contingencies Whatever the purpose of the loan, applications must explore all possible outcomes and show the business can trade through further adverse conditions. However, most SMEs will naturally aim to play down any difficulties facing their business and so will need close guidance to ensure that they provide contingencies for worst case scenarios. Proving a company’s historical performance is still important and cash flow forecasts and management information are a critical element in this. Business leaders also need to be prepared to be candid and share their plans for the future. Many companies will not have filed accounts since the pandemic hit and lenders may request more detail on the health of the business. Robust contingency planning can alleviate concerns and give insight into how the business will return to pre-Covid trading levels. 4) Upskill management A lack of specialist financial expertise is common in leaders of smaller SMEs. Accountants and brokers can play a role here, helping owners and senior management to understand how to make useful and accurate projections in order to make the borrowing process more efficient. For example, the ability to stress test projections will ensure that the company is well prepared for a range of eventualities - they should also understand their options should the worst-case scenario occur. Another useful skill is dynamic budgeting, which can help a business to operate flexibly when financial conditions change. Businesses should also implement regular reviews of debtors and creditors to allow them to address cash flow issues and set up a management dashboard that provides them with an overview of key information. Lenders will view this preparation favourably, particularly where financing needs are spotted before problems arise. 5) Discuss terms Alternative lenders may have flexibility in their financing terms compared to traditional banks. It is important that SMEs are confidently prepared to negotiate these terms once a conditional offer has been made. The previous steps will help support this and put the business in the best position to negotiate that’s favourable for all parties. When SMEs start to access alternative lenders, they will undoubtedly find lenders willing to have a conversation to understand their circumstances. This means they stand a good chance of finding a lender that will have a product that fits and see more SMEs and accountants turning to alternative finance. Steve Richardson is a director at Reparo Finance.

Why Government loans haven’t been a vaccine for SMEs and how accountants can help find an alternative

By Steve Richardson, director at Reparo Finance

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