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By Paul Crocker
2020 was potentially a transformational year for funding of businesses in the UK. Covid-19, and the financial systems’ response to the impact on business, kicked up a dust storm which is only now beginning to settle.
Here are some thoughts for 2021 assessing the potential repercussions of some of the decisions that were taken:
Let’s start with a controversial statement – “the UK Government was misguided to drop the requirement for “forward looking” information from the Coronavirus Business Interruption Loan Scheme (“CBILS”) application process and, more so, to make the Bounce Back Loan Scheme (“BBLS”) application as easy as it was/is.”
Obviously, some businesses were desperate to get cash in to stave off creditors and keep the business afloat. Segments of the business community wanted the Government to speed up the application process for CBILS to get cash out quicker to SMEs. However, the actions taken to address these issues are not beneficial to the funding environment in the mid to long-term, firstly on the implications of the estimated default rates and secondly the assumptions by some business owners that loan applications are as straightforward as a BBLS and/or there is no longer a need for projections. Whilst, undoubtedly, there are improvements that can and will be made to loan application practices, borrowers’ expectations need to be managed as we move through 2021 – to reinforce the mutual importance of a robust loan application process, which by necessity should include financial projections.
We all need to remember that the banks successfully petitioned UK Government to get aspects of the Consumer Credit Act waived for distribution of BBLS as they feared being hauled up for “mis-selling” when the dust had settled i.e., they recognised the application they were being asked to process did not contain sufficient safeguards.
“Losses and fraud from the Bounce Back Loan Scheme (BBLS) will only see more SMEs turned away by banks, and leave a funding gap needing to be filled” – is one headline that encapsulates part of the ugly “truth” about implications for business funding resulting from actions taken in 2020.
Two key statistics stand out as a stark warning:
- The National Audit Office have estimated payment defaults and fraudulent borrowing through the government’s BBLS scheme could amount to anywhere between £15bn and £26bn
- Bank of England figures show that SMEs borrowed£18.2bn more than they repaid in May, exceeding the previous record of £589m seen in September 2016. And presumably the £18.2bn excludes tax deferrals.
Based on the above, and the fact that UK Government debt is at record levels, one must question the banking system capacity (and/ or desire) to lend and the SME capacity to service any more debt – at least in the short-term.
Despite the above there are some positive transformational implications coming out to the funding sectors response to Covid-19, these include:
- A wider recognition among the business community that sources of debt funding do not start and finish with the high street banks. We are increasingly seeing the words “alternative finance” being replaced with “complimentary finance” in recognition of the changing perception to the wide range of debt finance options available – we have worked with a number of these in the latter half of 2020and expect this trend to continue into and beyond 2021.
- Increased use of AI/data driven analytics to speed up the decision-making process for lending applications.
- A two-strand lending system with one being AI/ data analytic driven and the other being more “old school” with increased interaction between lender and potential borrower – both are essential for a fully functional debt eco-system.
- Increased awareness of and understanding of non-debt funding for SMEs specifically equity and grants. On the former an extension of EIS could be desirable to open possibilities for older businesses to be (more) attractive to potential investors – we will see if anything happens on that matter in the coming months. Regardless, equity providers will continue to play an increasingly significant role in providing future funding for businesses.