Would-be borrowers say phone calls go answered; banks say that they are working flat-out with workforces that are also affected by Covid-19 and self-isolation. But speed of execution is now vital. A flood of lending was promised to avert company collapses, but it hasn’t happened yet.
Chancellor’s hybrid will do nothing to hasten banks
Analysis Nils Pratley Guardian 3 April
What was wrong with the government’s first version of its emergency loan package for small businesses? The problem is vividly illustrated by this statistic: only 983 companies have had loans approved out of130,000 inquiries made.
The running totals – released by the Treasury for the first time since the Coronavirus Business Interruption Loan Scheme, or CBILS, was launched – support loud complaints from small businesses in search of cash. The scheme was fiddly, slow and rested too heavily on banks’ judgments on eligibility.
The most important rejig by the chancellor, Rishi Sunak, is really a U-turn. In version A, banks were told that CBILS loans could be offered only to viable businesses that could not access finance on normal commercial terms. Now “all viable business affected by Covid-19” will be eligible.
The distinction is critical. Small business owners complained that banks were trying to steer them into standard interest-bearing loans, rather than the juicy government-backed CBILS product that is free of interest for 12 months and free of set-up fees. For their part, the banks argued they were merely implementing government rules.
The switch in approach will, almost inevitably, come at a cost to the public purse. But it should speed up processing and get more cash into the accounts of small businesses that need to pay wages and suppliers. Those 983 CBILS loans represent only £90m of lending – a trickle.
Sunak has also banned personal guarantees on loans under £250,000, another source of bitterness. But his other major reform is to fill a hole that became apparent almost immediately: the definition of a small business was set too tightly.
CBILS loans, worth up to £5m, are aimed at companies with an annual turnover of less than £45m. That threshold was too low for many midsized and family-owned firms who felt the parallel Covid Corporate Finance Facility was intended for much larger companies with formal credit ratings.
Thus Sunak has created a hybrid – a CBILS-based package for companies with annual turnover between £45m and £500m. The chief difference is that these loans won’t be interest-free, but their availability may solve the so-called “squeezed middle” problem. Up to £25m can be advanced to a borrower.
The chancellor will find it harder, however, to make the banks work faster. Would-be borrowers say phone calls go answered; banks say that they are working flat-out with workforces that are also affected by Covid-19 and self-isolation. But speed of execution is now vital. A flood of lending was promised to avert company collapses, but it hasn’t happened yet.