99% of the UK’s economy are SMEs. A lot of these SMEs have seen the ground move under their feet during the rapidly unfolding health crisis. The government backed CBILS initiative initially got off to a rather bumpy start, but the pace has picked up in recent weeks. As of now, out of 36,000 applications made, only 40% of applications were successful. The total value of loans approved now stands at £2.8bn. However, further modifications of the CBILS/CLBILS initiatives have to be made to support SMEs on the brink of collapse.
The question that comes to mind is “How could lenders step in to support SMEs?”. Justin Fitzpatrick, DueDil’s Co-founder and CEO, took part in a digital panel discussion touching on this hot topic alongside John Davies, Chairman at the Association of Alternative Business Finance, Karen Rudich, Co-founder and CEO of ElementaryB, Yasamin Karimi, Head of Product at Codat, and Christoph Rieche, Co-founder and CEO of iwoca. The moderator of this panel discussion was Eleni Digalaki, Managing Analyst at Business Insider Intelligence. This webinar is part of the digital UK FinTech Week 2020 organised by Innovate Finance.
What is the situation with CBILS right now?
The UK government has been proactive in launching programmes, such as CBILS and CLBILS, to support SMEs. However, there has been criticism of the way the program was conceived and implemented, which resulted in many businesses in need of support not able to access it quickly.
One of these challenges is around the complexity of the government led programs. “Complexity is the enemy of speed” - said Justin Fitzpatrick. Other countries which disbursed the funds much quicker, such as Germany and the US, were much more clear about the conditions of funding from the launch of the initiatives. In the US, the initial pool of $349bn was exhausted in less than two weeks, and an additional $310bn fund that was approved on Friday, the 24th of April and went live at 10:30am on Monday, the 27th.
The criteria of disbursement set out by the US government was much clearer to understand for both lenders and the banks. Another important feature of the US’s program is a substantially larger panel of 5000+ accredited lenders versus 52 in the UK. To add to this, the understanding that the many of the loans currently disbursed would be converted into grants and forgiven has also played a major role in getting cash over to the businesses in need much quicker.
Other governments who implemented a 100% guarantee, such as Germany and Switzerland, are able to get the loans disbursed quicker. On the other hand, Christopher Richie, Co-founder and CEO of iwoca, has suggested that “If the government guarantees 100%, as a lender, you will not be required to do diligent credit checks but also there will be no incentive to collect the outstanding balance anymore”. On the UK’s side, the proposal to offer 100% government guarantee, backed by the Governor of the Bank of England, Andrew Bailey, is still on the table. Moreover, being clearer about the conditions of funding is one of the major aspects that the UK government needs to further improve on.
To step up, SME lenders need liquidity
Another key aspect of the CBILS that not everyone might be aware of, is that the panel of accredited lenders have not been given any cash by the government at this point. Lenders are expected to lend their money and then claim it back from the government. One other aspect of why there was a much greater success in disbursement of the funds on the other side of the Atlantic is that the US government has given the money to the lenders. While in the UK, the issues of cash flows and liquidity of the lenders themselves is apparent.
SME lenders want to support the businesses in this difficult situation. “Between the universe of the UK SME lenders [who fall under the umbrella of FinTechs], we have 455,500 business customers who, therefore, we have the ability to reach this volume of people fairly quickly” - said John Davies, Chairman at the Association of Alternative Business Finance. However, without liquidity, the SME lenders are not going to be able to start to actively lend. There is a need for a form of liquidity fund put together by the government that could then be lent to micro and small businesses. It is important to look after the SME lenders as they need to survive to be able to support the SME economy.
It’s time for banks to become truly digital
The challenge is then passed onto the High Street Banks. There is no surprise that RBS has lent more than half of the CBILS loans amounting to £1.3bn to date with Barclays, HSBC and Lloyds starting to gain ground. However, “traditionally, High Street banks operations relied on paper applications, in person interactions and physical branch networks” - said Justin Fitzpatrick. This could be one of the biggest reasons why we are seeing a delay in money being disbursed to the SMEs in need.
So far, banks were quite slow in adopting technology and were predominantly focused on replacing legacy systems. “It is almost a perfect storm where banks [and lenders] have to deal with unprecedented volumes of applications” - said Justin Fitzpatrick. This situation will force the financial services industry to make a giant leap forward in adapting technology and becoming fully digital, from end to end. We should also not forget that banks have to make tough decisions when considering the loan applications. To make these calls more accurate, “alternative measures of business health [apart from the financials] such as peer analysis might be required” - added Justin Fitzpatrick.
Understanding the impact of the crisis
The impact of the crisis on the SME economy has already become apparent. A real time view into the market, powered by DueDil’s Business Information Graph (B.I.G.)™ , shows a 50% reduction in newly incorporated companies in April in comparison with last year. Moreover, there is a 87% increase in companies going into liquidation in early April compared with last year’s figures.
“The vast majority of companies have not received any cash yet and in some cases no revenues” - said Christopher Richie, Co-founder and CEO of iwoca. "The stakes are really high now and the government and lenders really need to make the right choices. We should not forget that the FinTechs have a lot to contribute to the economy in this time of uncertainty."
“The UK Government and the lenders need to continue to challenge themselves on how to make the scheme simpler and deliver cash to a larger number of SMEs, quicker” - suggested Justin Fitzpatrick.
At DueDil, we look to proactively support the SME economy during this uncertain time. Our tech team has built an online service for lenders - the CBILS Eligibility+ Endpoint. It assesses business viability for coronavirus business support measures including the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Watch our on-demand webinar to find out how you can use our API to get insights on CBILS-eligible companies.
Moreover, our recently launched Covid-19 Impact Barometer powered by the insights from DueDil’s Business Information Graph (B.I.G.)™ put into context just how large the impact of this health crisis is on the SME economy.