There is little doubt that the Government loan schemes have been the dominant force in commercial lending since their introduction in March 2020.
The schemes have consisted of three different products each catering to different parts of the SME marketplace.
The Coronavirus Large Business Interruption Loan Scheme (CLBILS) caters for businesses turning over £45m+ and offers loans to SMEs for amounts from £5m to £200m.
The Coronavirus Business Interruption Loan Scheme (CBILS) offers loans from £50,001 to £5m for smaller businesses.
The Bounce Back Loan Scheme (BBLS) – Introduced due to the slow take up of the CBILS scheme on May 4th, offering loans from £2000 to £50k with a maximum loan amount based on 25% of the businesses last year’s turnover. This scheme was introduced, not only catering to the smaller end of UK business, but also with significantly reduced due diligence, especially on forecasting the future trading viability of the applying business.
More information on all these schemes can be found at https://www.gov.uk/coronavirus/business-support.
The immediate and short term impact
The scope and size of these schemes is unmatched in UK financial history with a total of approx. £65bn lent under these schemes to approx. 1.5m UK based SMEs, of which a majority is underwritten by UK Plc (for more information on the differing level of Government guarantees please go to https://www.british-business-bank.co.uk/finance-options).
The impact of this on the High Street banks is such, that effectively (with a few exceptions) they have solely focused on these products alone during the COVID pandemic leading to several previous agreed lending facilities being withdrawn, and a significant reduction in support to the SME marketplace outside of these loans.
The knock-on impact has, arguably, had an even larger impact on secondary lenders. The combination of the fear of increased loan defaults from existing clients, and uncertainty about previously agreed facilities, led to the wholesale withdrawal of previously sanctioned loans and a suspension on new applications. This cut a vital lifeline for multiple businesses who relied on this marketplace to assist where banks have already pulled back.
There has also been a massive impact on the previously buoyant unsecured lending marketplace. The rise of lenders in this space (led by the dominant Funding Circle) has been the revelation of the SME lending space in recent years, with Funding Circle alone responsible for over £10bn lent to over 90,000 UK businesses with a significant upward trend year on year since launching in 2012 (https://www.fundingcircle.com/uk/statistics).
Due to the aforementioned uncertainty caused by Government lockdowns, default rates have increased and while some larger lenders (such as Funding Circle for instance) can manage these defaults and the predictable losses (https://www.ft.com/content/a9af95bb-febe-4b53-bc72-99367755fca0), many have folded altogether cutting yet another lifeline for SME’s especially at the smaller end of the marketplace.
The response from many of these lenders has been to ignore their previously successful business model and move 100% into the CBILS market, offering loans generally where clients Banks have declined the facility or where a client doesn’t have a relationship with one of the Banks offering the loan.
Many lenders here have used the Government guarantee to shore up their lending book, securing a 80% Government guarantee for debts previously secured against a directors guarantee only. This has been a by product of CBILS, effectively transferring liability for potential bad debt from directors and investors to UK taxpayers.
The future of business lending
Much of the future of the market depends on the outcome of the Government loan schemes on the banks’ balance sheets and bad debt provision.
While the supporting guarantee from the Treasury should, in theory, offer comfort to lenders, the reality may well be very different. There have been multiple Government backed schemes to encourage lending to the SME marketplace in recent years, the most notable being the Enterprise Finance Scheme (EFG), and invariably they end in disputes.
While the EFG scheme cannot compare in scope, size, and liability to the COVID loans (https://www.british-business-bank.co.uk/ourpartners/supporting-business-loans-enterprise-finance-guarantee/latest-enterprise-finance-guarantee-quarterly-statistics) it should act as a warning of how these agreements can unravel with widespread confusion as to where liability lies (https://www.icaew.com/technical/pba-community/deliver-business-advice/efg-beware-the-hidden-truths).
There is every reason to believe that if the economy recovers and the loan schemes work as outlined, then the lending market should be ‘back to normal’ by the end of 2021. While the High Street banks are still very reluctant to lend to trading businesses outside of the Government schemes and to excellent existing customers, the alternative lending space does seem to have woken from its slumber in the last couple of months and lending is now notably easier to obtain than during the summer, albeit, a majority of this lending still requires solid background security, such as a property or strong debtor book, to proceed.
The impact of tier 4
A new intangible was thrown into the mix by the Government at the end of 2020 with the announcement of tier 4 restrictions – https://www.gov.uk/guidance/tier-4-stay-at-home.
This has continued the shutdown of a significant part of the UK but, importantly, put London within the most restrictive part of the lockdown restrictions.
We have yet to see the impact of this but it’s likely to become a significant issue, the longer Tier 4 lasts into 2021.
While it can be extremely easy to be critical of High Street banks and the Government loan schemes, the scale of fresh lending to UK based SME is unlike anything ever seen in economic history. These products (especially the Bounce Back Loan) have kept hundreds of thousands of businesses on life support for a majority of 2020 and combined with other elements of the support program, have protected millions of jobs.
Despite this short-term benefit, it seems highly likely that the UK taxpayer will be bearing the cost of these programs for many years to come and the SME owner is no different.
While the business lending marketplace will recover, I suspect it will take a number of years for confidence to return and Balance sheets to be restored to a point where lenders (especially the High Street banks) feel comfortable loosening the purse strings to a point where we can consider a ‘return to normal’.