The UK government has pledged up to £330 billion of loan guarantees and grants for small businesses under the Coronavirus Business Interruption Loan Scheme (CBILS). This scheme aims to get finance to small businesses for working capital so they can continue their operations, retain staff and pay their suppliers.
The amount of money pledged dwarfs the response even during the height of the 2008/2009 financial crisis. Getting this money to businesses is time critical as they try to stem the bleeding while demand is collapsing. Many are already having to take incredibly tough decisions. While government support is a wonderful start, deploying this amount of capital on such a short time scale presents its own challenges.
To put the £330 billion in context, Virgin Money, one of the bigger lenders to UK small businesses, lent £6.5 billion in the three year period ending in 2019. They, plus 40 others, are now being asked to disburse 50 times this amount in a matter of weeks and months.
Will SMEs be able to navigate the loan process quickly enough?
Even with strong policy measures such as CBILS backed by government guarantee, SMEs still face familiar hurdles when trying to get finance. SMEs will still be required to provide detailed information on the nature of their business and their finances, at a time when they are having to fight fires on multiple fronts.
According to British Business Bank’s 2019 Business Finance Survey, only 9% of SMEs currently use bank loans as a source of finance. With less than 20% using alternative lending such as leasing and hire purchase. This leaves more than two thirds of SMEs that are unfamiliar with the loan application process, and lenders with limited information on these first-time borrowers.
As details of the loan scheme have come to light, there has already been criticism and confusion around the terms being offered to small businesses, including risky personal guarantees and high interest rates. Will SMEs realistically be able to find the most competitive offers when they are under such intense pressure? It’s doubtful. Which suggests that the ramifications could last far beyond the length of the initial economic shock.
Can lenders cope with pressure to lend?
There is also a huge amount of pressure on lenders. Pressure from the government, from small businesses and from society, to get this money into the right hands as quickly as possible. Although the 80% guarantee may be appealing to lenders, the £330 billion figure is six times higher than the total gross flow of new loans to SMEs (excluding overdrafts) in 2019. A huge amount to distribute in time to save the most at-risk companies.
Lenders are facing the same problems in processing applications that borrowers have when applying. Strict policies for compliance and fraud prevention must be observed, perhaps even more so during these unprecedented times.
Too often these applications are still paper-based and require a high degree of human intervention, sometimes taking weeks for a business to actually receive the funds in its account. Manual processing is inefficient at the best. During a crisis, when most of the economy is learning to work remotely, it will be an even bigger hindrance. How many small businesses will fail while they wait for a lifeline?
Understanding the true nature of a business, including its history, its viability and the relationships between directors and shareholders is complicated. Doing this while lending unprecedented amounts of money to SMEs represents a huge challenge for the lenders that need to modernize the way they onboard and assess these businesses.
What do government and lenders need to do next
The government has promised the funds, but it also needs to empower lenders as quickly as possible. Early reports suggest that things are not moving fast enough – prospective lenders trying to apply to the scheme are still waiting to start the accreditation process.
An Institute of Directors (IoD) survey found that 40% of their members had already contacted their bank about an emergency loan. Extrapolate this across the 4.5 million SMEs in the UK and it becomes clear how important it is that as many reputable lenders as possible are able to start processing applications, especially organisations that are digitally native and can offer streamlined, automated decisions to SMEs.
For their part, lenders need to take bold steps to transform how they work. This crisis has compressed the timeline within which B2B financial service providers need to change their operating models. Digital automation is no longer a competitive advantage, it’s the only way to do business, particularly when faced with circumstances that are testing all of us.