The hidden pitfalls of Government COVID-19 lending schemes

July 2nd, 2020

Throughout the Coronavirus pandemic, we have remained committed to clients to help them navigate the many different business finance schemes introduced by Government. The situation we are facing can feel overwhelming; and for those who have worked for years to make successful businesses which are now at risk, being able to make a judgement on the best financing route to take can add extra pressure.

So far, we’ve been able to help numerous clients understand the difference between the new lending and grant schemes that have been introduced and enable them to progress their applications. Doing so has retained many jobs and provided the reassurance businesses need to see light at the end of the COVID-19 tunnel.

However, we are still receiving a wealth of enquiries about the Coronavirus Business Interruption Loan Scheme (CBILS), from clients who are querying why their application hasn’t moved forward and if, indeed, it is the best route to take to secure emergency funding.

Introduced on the day the UK locked down, 23rd March, the CBILS was designed to support the continued provision of finance to SMEs during the COVID-19 outbreak. It set out to give the approved lenders for the scheme a Government backed guarantee that any money lent out to businesses would be recouped, at a rate of 80 per cent. Since the scheme launched, it has been revised following criticism about the application process, and the number of eligible lenders has rocketed. But the main critique of CBILS is its low approval rate.

Recent data shows that UK banks have approved just 50 per cent of applications to the CBILS. According to the latest figures, 81,124 businesses had applied for loans of up to £5million by 17th May, and just 40,564 of these had been approved.

Many have pinpointed the strict criteria for commercial lending as the downfall in the scheme. Banks appear to be basing their lending decisions on a business’ last 12 months performance to identify whether they could repay the loan, as well as asking for personal guarantees. As a recent article on City AM stated: “The core and basically simple objection to CBILS is that it fails to address the fact that most SMEs are already leveraged and cannot comply with the set CBILS lending criteria for more debt.”

In some cases, banks are acting in a business’ best interests. They are working to prevent companies from receiving loans which they categorically won’t be able to pay back. If you were a viable business before COVID-19 then, in their eyes, you are likely to be viable afterwards and they will hedge their bets on you, and invest in the form of a loan. If not, you may want to consider other options.

For example, Bounce Back Loans (BBL). These allow small businesses to receive a loan worth a quarter of their turnover, up to £50,000, within as little as 24 hours. Of the 581,516 UK businesses to apply for a bounce back coronavirus loan, 464,393 have already received the money – an 80 per cent approval rate. Almost £15billion has been lent under the BBL scheme, double the amount under CBILS and despite it going live a month later.

That said, this scheme comes with its own pitfalls. Many more lenders are entering this arena than CBILS because any finance awarded is 100 per cent Government backed. These newer entrants, typically, tend to be less interested in a business’ financial health and are hiking up their fees and interest rates to lure in businesses which are arguably more vulnerable and will be less able, in the long term, to pay back the capital.

In some cases, this is also true for a handful of the newer lenders to be approved under CBILS. Whilst they face a potential 20 per cent loss, due to the scheme only being 80 per cent Government backed, they are hedging their bets on more risky lending decisions and in return, charging considerably higher fees and rates.

Our advice to businesses in this climate is to consider every type of funding available. As well as loans and grants, there is the option to utilise invoice financing and extend your overdraft, for example. Though it would mean a change in your usual practice and ways of working, these options offer a more secure, long-term alternative to lending.

The Coronavirus pandemic has highlighted the huge differences between every single business in the UK, and as such, we continue to give our clients a bespoke service, with tailored advice that suits their individual needs. The solutions we have offered work in the same way; every business will look different after lockdown, and the future of every organisation will be uniquely shaped by COVID-19.

If you have any questions about Government lending schemes and want impartial advice that is moulded around the shape of your business, please call your Champion advisor.

For those who aren’t a client of Champion and want to find out more, then contact your local Champion Accountants office. We are here for you.


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