The Government’s various COVID support measures are expected to cost approximately £500B once completed (various sources) but this doesn’t give the full picture when it comes to support for SMEs where there is a considerable amount of uncertainty about the final bill and will remain so for many years.
There is also doubt over how these measures will impact on more conventional business finance for a number of reasons, some of which I will explore here.
The Bounce Back Loan
There is only one place to start and that is with the Bounce Back Loan (BBL). For those living under a rock, this is the cheap, minimal due diligence loan which over 1.5m businesses took during the pandemic with a total loan figure of £47B being 100% guaranteed by HMRC.
As well as potentially creating a liability for HMRC up to 2031 (when the final loan is repaid), the BBL, and its big brother the CBILS Loan (Corona Business Interruption Loan Scheme) which guaranteed 80% of a further £26B worth of loans, has flooded the SME marketplace with finance which has led to several lenders expressing severe caution or even pulling away from the market altogether. It seems highly likely that once the latest Government Loan Scheme, The Recovery Loan Scheme, ends in June 2022, the options for clients will be severely restricted when seeking short-term or unsecured finance.
The BBL will also impact the way the High Street Banks (still responsible for a majority of SME lending) treat the market for many years. With defaults estimated anywhere between 20% and 40% and the Government pushing back on their commitment to guarantee these loans, the losses are likely to run into the billions. This is unquestionably having an impact on a bank’s appetite to lend in the SME space, in fact, we are already seeing this as the credit policy of the same Banks continues to tighten up.
The most significant Government measure taken at the start of the COVID period (March 2020) was the nationwide lockdown implemented which led to household restrictions, businesses being forced to close and schools moving to online teaching.
This had a huge impact on the business lending space as the uncertainly caused (when would the country reopen?) caused an immediate withdrawal from the market of many lenders, some not to return, as well as many clients having previously agreed facilities pulled away from them, regardless of the position. This left many business owners out of pocket for valuation fees, solicitor fees and created great panic and disruption for them.
In turn, this has led to an increased distrust in lending institutions from SME owners who were let down by the kneejerk decisions made as well as reduced confidence in brokers who, on many occasions, had to give the bad news.
The fallout from lockdown is still being felt now. Customers’ lending requests are largely based on their trading performance and the significant drop in turnover and profitability felt by many businesses during lockdown is having a significant impact on their ability to be accepted for finance even in 2022 and even with the consideration given for the generational circumstances.
The BBL has had a major impact on the business owner’s attitude towards the pricing of alternative business lending. Due to the favourable nature of the BBL with regard to the fixed interest rate (2.5% – astonishingly low for any business borrowing), the lack of arrangement fee for the facility (usually 1 – 2%) and personal guarantee (always a requirement for Limited Company debt), presenting a client with more ‘traditional’ terms and conditions presents a new challenge.
If you have just borrowed under the most favourable terms ever presented for a commercial loan, then looking at alternatives can restrict the appetite to borrow and prevent future growth which this lending might enable.
There were a number of measures introduced during the COVID period to assist the business owner who traded from a premises. As well as being able to furlough their staff and claim the beneficial terms of the BBL, ratepayers were automatically presented with a Grant and the ability to apply for further grants as well. As you may expect, these were not repayable!
It also became increasingly difficult to evict a challenging commercial tenant with them having the grant funds to continue trading and also benefitting from protection from eviction, regardless of any arrears position.
While this has been a lifeline for many small businesses, it has been a major challenge for landlords and therefore for the Banks who lend to them.
The protection to tenants has created loan arrear positions for landlords who have not benefited from the same level of protection (the protection for mortgage payments did not apply for commercial landlords generally) which has led to bad debts for lenders and had a negative impact on lender appetite for commercial property.
There is little doubt that despite the long-term negative impacts the Government policies will have on business lending, especially the BBL, there is also strong evidence that without them, the situation would have been considerably worse.
The BBL opened finance to businesses who otherwise would not have met lender criteria for similar sized loans and, in many circumstances, has enabled them to survive and hopefully, continue to grow post 2022!
The other loan schemes (CBILS and RLS) were available to slightly more established businesses and many of these facilities have been used in a very positive way. They did this not only to survive, but also to grow via capital investment or allowing businesses to take on additional staffing or clients. I have seen many businesses using these loans in hugely positive ways to before themselves and the wider economy.
While the aforementioned grants have sometimes proved a challenge for commercial landlords, they have prevented many small businesses, especially in retail and hospitality, from failing and on many occasions, defaulting on business debt.
It is highly likely that without this Government support, there would have been a huge increase in business failures, increased lending defaults and increased losses for commercial lenders in this space. Inevitably, this would have led to a further reluctance from Banks and alternative lenders to deal in this space moving forward.
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- The impact of Government COVID measures on business finance - April 28, 2022