Government scheme to help business is much too slow and bureaucratic – SMEs will go bust

Maggie Pagano talks to Sacha Bright, chief executive of Nextfin, the equity crowdfunding and peer to peer aggregator, which brings together investors and entrepreneurs to raise alternative finance via equity or debt.

Over the last few days, Bright has been in talks with the bosses of small companies desperate to apply for the government’s emergency package of loans and grants launched last week to protect the country’s businesses.

Bright’s verdict is gloomy. He warns that unless the government moves swiftly to speed up the Coronavirus Business Interruption Scheme, thousands of SMEs will go bust.

Q. What is your experience of how the Coronavirus Business Interruption Loan Scheme, which I understand will be run along a similar line to the Enterprise Finance Guarantee (EFG) scheme, is working for SMEs which need to take out emergency loans?

Bright: The scheme is not fit for purpose. The banks will not take on the risk of the businesses that will fail because of the virus. Only yesterday this was confirmed to me when Barclays said that directors must provide a personal guarantee and also a debenture over the companies’ asset for the full £250,000 loan.

Q. What will be the impact of this unless the government moves more swiftly ?

Bright: Thousands of early stage and pre-revenue businesses will fail because they do not fit the criteria. Expecting business owners to sign Personal Guarantees will not work, and many will not have the credit rating or security to support them. While the Enterprise Finance Guarantee scheme has been heralded as a big success, it has only lent £3.3b to 30,000 businesses since it was set up in 2009 after the financial crash.  That’s just 2,700 per year across 40 partners. And less than 70 loans per lender. It also takes weeks sometimes months to get approved.

Q. What is the aim of the CBILS loan ? 

Bright: It is supposed to support tens of thousands of businesses and hundreds of billions of pounds have been put aside for the scheme by the government. Whether a business is deemed as a success or not by a lender, these companies are still employing staff. Yet those staff and the business will fail without government support because the epidemic has turned the economy off for six months. The purpose of the scheme was to stop companies from sacking their employees.

The problem is that the usual roots for SMEs to seek equity funding have dried up. Nextfin, which monitors Equity Crowdfunding, has seen a huge decrease in investments and the early stage funds I know are in turmoil looking after their own portfolio.

The link to the scheme can be found here.

Q. What can the government do to improve the CBIL scheme?

Bright: The loans need to go further, and they need to be clearer. Many of the partners which are on the EFG scheme specialise in lending to the northern territories, some are asset finance or invoice finance specialists and are not equipped to deal with business loans. Furthermore, they need to guarantee the whole loan or up to an amount that the banks are prepared to take the risk.

Q. Why is Funding Circle, or the other big peer to peer lenders not on the CBIL list when the British Business Bank invests money through them to lend out? 

Bright: I don’t know but it seems very strange to me. Why doesn’t the government guarantee their loans too? Maybe they believe there is a conflict of interest. This needs to be explained. It’s particularly odd as the banks get the advantage of using the Financial Services Compensation Scheme for savers, whereby savings are protected per account up to £85,000. Surely this would kill two birds with one stone? It would support the new P2P industry and allow savers to get a higher interest rate which would be protected up to 80% by the BBB.

Q. There is £60 billion sitting in cash ISAs, where interest rate have been slashed. Is there a way that ISA investments could be channeled to help SMEs?

Bright: Why not help savers and entrepreneurs alike by connecting the two and use the money that is already in cash ISAs? Currently financial advisors do not advise investors to invest in P2P because its too high risk. This would change if BBB guaranteed the loans P2P sites issued.

Q. Are there other sources of investment that can be drawn on? How can alternative financial marketplaces such as Nextfin and other crowdfunders help out in this crisis ?

Bright: Yes, there are many other sources of investment which should be looked at. If you think positively for a moment, there are Local Enterprise Partnerships in every county which have millions to invest in equity. Why don’t the LEPs team up with Crowdcube, Seedrs or even us at Nextfin to match funds for every early stage business? This would encourage investors to co-invest alongside them re-sparking the equity crowdfunding market.

The economy is only on hold for 3 to 6 months. If we nurture these new companies, they can employ thousands and we will be ahead of the curve when we come out the other side. And those that do have spare money to invest, can be supporting these businesses and be part of the solution.