The state of play regarding business lending heading into the second half of 2020

This article would have looked vastly different if I had penned it at the start of 2020!

At that time, I would have been talking about a (relatively) booming economy and a very buoyant lending marketplace due to the growth of the peer to peer marketplace and challenger banks offering a real viable alternative to the traditional High Street Bank.

The COVID 19 pandemic has changed all this!

Now, the marketplace is dominated by the Government backed loan schemes – The Corona Business Interruption Loan Scheme (CBILS) and The Bounce Back Loan (BBL).

The CBILS scheme was launched on the 23rd March as part of the Governments wider stimulus program to help manage the COVID crisis and was designed to offer 40+ lenders Government guarantees to enable them to release funds at preferential interest rates with various benefits attached to these loans which allows businesses to continue to trade throughout the crisis. The number of lenders on this approved panel is now over 100 (as of September 2020).

The CBILS Key Features

  • For loans up to £5m and terms up to 72 months (a recent announcement has increased this term to 132 months but details are still flimsy at the time of writing)
  • Government cover the interest payments for 12 months
  • No personal guarantees for loans under £250,000
  • No arrangement fees to apply
  • Business must be proven to be viable post COVID 19

Rather predictably, this initially proved to be very attractive to SME owners. But, after a month, approval rates were very low (under 10% of enquiries) and many business owners were aggrieved at poor turn around times and onerous underwriting conditions from Banks.

In response to this failure, The Bounce Back Loan was introduced by The Chancellor, Rishi Sunak in late April and went ‘live’ for an initial six-month period in May. This has now ben extended, along with the CBILS until the end of 2020.

Its key points were broadly similar to the CBILS but the key differences were as follows:

  • Loans from £2000 to £50,000 for UK based businesses (CBILS now £50k+)
  • Available from initially 40+ lenders
  • A fixed interest rate across all lenders of 2.5% per annum
  • No forward viability assessment required to demonstrate serviceability of the loan (a key difference to CBILS which considerably speeds up the due diligence process)
  • A business may borrow up to 25% of their turnover to the limit of £50,000
  • Government to guarantee the full debt for the lender (up from 80% for the CBILS)

It was clear that this product was aimed at the smaller end of the SME marketplace and, with the significantly reduced due diligence, it emphasised speed as the priority rather than quality of applicant. To date, over 1 million businesses have taken advantage of the BBL with over £30bn guaranteed by the Government under this scheme alone, and while a majority have taken the finance in good faith, the lack of due diligence and self-certification of the underwriting process has led to accusations of fraud.

There are several ways in which the information under application process or using the funds granted under the BBL could potentially been seen as fraudulent:

  • Falsifying trading turnover when applying to borrow more than you would otherwise be entitled to.
  • Not declaring the business was in trading difficulties on December 31st 2019 – a key point of the facility, which is to support otherwise viable businesses struggling with COVID 19, not prop up already failing ones.
  • Using the funds for a purpose other than for the benefit of the business. This may be for a personal asset or for a property purchase. This is a technique actively encouraged by several property ‘gurus’.

It seems that HMRC have finally realised the potential exposure to the Treasury and made a commitment to prosecute if the scheme is misused.

The questions remain

  1. Has the horse already bolted?
  2. Will resources realistically be available to investigate fraudulent applications bearing in mind the numbers involved?

Time will tell. It seems that Banks and HMRC are already braced for the worst with significant bad debts expected from the scheme.

Outside of the Government schemes, the marketplace has changed considerably and may take several years to return to a form of what was previously seen as normality

Many peer-to-peer lenders have become exclusive CBILS lenders. This includes The Funding Circle who have been responsible for £6.2bn to 57,000 businesses in recent years. This is a move by these lenders to ensure survival with Government-backed loans making up for the expected increase in defaults and write-offs expected in the market post-COVID.

The High Street Banks have a significantly reduced lending appetite, especially in relation to considering requests from new clients and this, combined with their focus on the Government schemes has severely restricted options for clients looking to move banks or take on new finance which sits outside the remit of CBILS or the Bounce Back Loan.

Despite this, there are still options for client looking to grow in this marketplace. In the absence of ‘traditional’ lenders, many have moved to towards lenders previously in the secondary lender, or alternative lender space.

Due to this, many lenders operating in this marketplace have seen an upturn in enquiries as they fill in the gaps previously held by the High Street lenders.

While this is positive as it keeps the market alive, there are medium- and long-term concerns over the lending marketplace. Potential bad debts arising from the Government loan schemes, plus the time taken to investigate them, will inevitably have an impact on the future viability of Commercial Lending for the Banks.

While it is impossible to predict the future I do believe we are likely to see a significantly reduced lending appetite for the SME marketplace from Banks along with stricter pricing. It is also likely that lending appetite to certain sectors, primarily Commercial Property investment and retail, will continue to reduce leaving many of those who operate in these sectors on their own.

Reference links

James Blacklaws
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James Blacklaws

James, an ex-banker, is a highly experienced and fully Independent Commercial Finance broker, authorised and regulated by the FCA. With whole-of-market access, he sources funding and business loans for those wishing to buy commercial premises, or those looking for funds to develop their business. James offers a personal, one-stop-shop approach to funding solutions. He is always on hand when you need him. He specialises in helping businesses declined by their banks; businesses looking to grow, survive and purchase commercial property.