Government must go for 100% backed loans to save Britain’s smallest companies from virus crisis

Pressure is mounting on the government to provide 100% state-backed loans for small businesses if it wants to avoid millions more people losing their jobs and an entire generation of companies being wiped out.

Critics of the government’s lending scheme include some of Britain’s most influential policymakers and business chiefs who claim the country faces economic Armageddon unless it takes swift action to salvage the UK’s six million SMES.

They include the most diverse range of senior figures including policy makers at the Bank of England, members of the Treasury Select Committee, the UK’s bank bosses and leaders of local business communities who fear for the future of their regions.

Britain’s smallest companies employ two thirds of the country’s private sector workforce, generate around £2.2 trillion of turnover and provide billions in tax revenue. Fears for the future of these companies makes strange bedfellows in this extraordinary crisis: both the former chancellor, George Osborne, and shadow business secretary and former Labour leader, Ed Miliband, have called on government to overhaul its scheme and go for 100% guaranteed loans as the only viable solution to save the UK’s small business bedrock.

One senior policy-maker said last night: “It’s only a matter of time. Everybody now realises the government has to go the full way and back the banks with 100% loans.”

“The government is the lender – and the insurer – of last resort. And you can’t blame only the banks for this crisis of funding. They are doing what they can.”

While most critics accept the Chancellor’s £330 billion Coronavirus Business Interruptions Loans Scheme for small businesses was well-intentioned and generous, they warn the scheme is neither working either fast enough nor reaching those small companies that most need it.

At present, the government has offered state-backing of 80% of the loans which are being distributed by the 40 or so high street banks and other approved lenders.

Conservative estimates suggest that up to £200 billion of the emergency schemes is needed to reach the UK’s six million small to medium companies to keep them afloat over the comings weeks yet so far only £1bn has been approved in loans.

One lender said last night: “Most of these businesses need cash flow now and if they don’t get it they will be closed in seven days’ time.”

Advisers and bankers close to the millions of small businesses now struggling because of being put into deep freeze during the lockdown period say the problems with the existing loan scheme are two-fold.

First, that many of approved legacy high street banks are inherently risk averse and are demanding so much paperwork relating to the applications that they are paralysed in their decision making.

Second, that although the banks are trying to process applications as fast as possible, they too are facing huge operational problems in administering the thousands of loan applications with staff working remotely. In some cases, the big high street banks have had to set up new emergency call centres in the UK because their Indian call centres are on lockdown and no longer functioning.

To date, only 2 per cent of the 300,000 request for loans have been approved. This week – three weeks after the scheme was first announced by the Chancellor – some £1.1 billion had been lent to only 6,000 of the UK’s six million SMEs.

By contrast, the US, Swiss, German governments which have offered to provide their country’s banks with loans which are 100% backed by the state have been able to process.

One businessman, Andrew Cranfield, who represents a group of business owners, entrepreneurs and companies in the South West of England, warns that unless the government changes the nature of its schemes there will be millions more job losses and business closures.

He says: “The Government needs to change direction in its support if it’s really going to avoid further job losses on a massive scale and this support needs to be without recourse to businesses: whether in the form of a government-backed insurance claim or cash injection for businesses, or announcing now that loans will be waived in their entirety.”

Cranfield is so concerned by what he is witnessing on the ground that he has written to the Chancellor, Rishi Sunak, and the Business Secretary, Alok Sharma, Cabinet Secretary, Mark Sedwill, setting out his concerns that the CBILS is not operating either efficiently or properly.

In his letter seen by Reaction, Cranfield writes: “Some estimates put 800k to 1 million business going under and unemployment increasing by up to four million. There are 5M SMEs employing an estimated 22M people. It is also estimated that 10% of all SMEs have already gone out of business since the start of the pandemic.”

He adds: “The banks are effectively determining which firms survive and which do not, using pre-pandemic lending criteria. The longer it takes to get the right sort of funding in place, the more precarious the financial position of SMEs will become and the less attractive they are to bank funding.”

Cranfield’s fears are echoed at the most senior levels of the City and at the Bank of England. One senior banker said: “There is a huge gap in the government’s scheme for small businesses which is going to hurt some of Britain’s most high-growth and successful companies. For big businesses, the CCFF scheme is much clearer and a 100 % backed and has proved highly successful with many companies accessing the corporate bond market.

“But the problem is with the small companies and start-ups. Many of them are still loss-making or highly leveraged but will go on to be the high-growth companies of the future. They don’t have any cash flow and will be finished in a few weeks’ time. And they will not get these loans because the criteria is so tough. They are too restrictive.”

But he added: “You can’t blame the banks. Banks are risk averse. They are having to use the judgment of Solomon in extremely difficult circumstances. Plus, they have the problem of having to process all these applications in a matter of days.”

By contrast, the US government has from the start of the virus crisis been offering to guaranteed the banks a 100% of their loans to small businesses. So too have the Swiss which were swift to kick-start an emergency lending scheme which started at the end of March – and was 100% guaranteed by the state – saw funds flow to more than 76,000 small firms by April 10.  Swiss loans are up to 10 per cent of turnover to a maximum of £414,000.

The Germans, which has extended €7 billion to companies, also began life similar to the UK’s lending scheme with 80% of loans guaranteed. But the German government, facing similar problems to the British, has now extended its scheme to back the full loan.

There is another problem facing many of Britain’s small businesses, start-ups and sole traders. A big proportion – up to a sixth – do not traditionally choose commercial banks as their main source of finance.

There are many other options to traditional bank lending: the peer to peer alternative market place raising both debt and equity now represents a significant part of lending to Britain’s small companies.

Only a few of those peer to peer lenders have been allowed on to the government’s approved lending list which is being backed by the British Business Bank. Funding Circle, for example, has been approved by the US government but not by the British despite it being a UK-based lender.

Many other alternative lenders have been working out flat-out behind the scenes to find solutions to help provide small companies with quicker and easier route to loans. Many have applied to the BBB, but have yet to hear back.

One of these alternative lenders is Lee Birkett of JustUs, an electronic marketplace for mortgages and loans. Birkett says that there is now a network of 10,000 IFA’s – all regulated by the Financial Conduct Authority – ready to approve loans online with his marketplace. Birkett says that loans of up to £50,000 can be approved on a paperless one page eSign Loan Agreement with self-declaration and up to £5M with IFA or Chartered Accountant pre-Covid revenue confirmation.

JustUs, says Birkett, is working with Barclays to take client money and he has capacity to approve up to a £1 billion in loans. “SMEs and sole traders can open accounts with no human interaction required. Automated Know Your Client (KYC) can be delivered by via a mobile app through Google or Apple. HMRC is ready to integrate into the process via its own application program so that it can validate tax reference numbers.”

He adds: “We are ready to go. We have a system in place to allow tens of thousands of loans to be approved and processed daily. Only a few months ago the government was praising Britain’s FinTech sector as the best in the world. It is very odd that they are not drawing on that excellence to help through this crisis. Why not?”

Why not indeed. So far Rishi Sunk has shown that he is open to criticism, and open to adapting the CBILS scheme when it has been shown to be ineffective. The scheme was drawn up in an emergency situation and at haste. It was never going to be perfect at the first shot.

Will the Chancellor show he is big enough to make one more leap of faith?