The Coronavirus Business Interruption Loan Scheme (CBILs) was launched to much fanfare, with people lining up to praise the far-sighted, generous nature of the programme and proclaim how much it would do for small business. A staggering £330 billion was set aside for interest-free loans, with the Government willing to sit behind 80% of the debt.
Like most of the Chancellor of the Exchequer’s recent interventions, the idea was to put part of the economy – in this case small business – to sleep, allowing it to wake, rejuvenated, once the lockdown eased.
But as time has passed, praise has turned to consternation. CBILs has never really got out of first gear, with critics blaming everyone’s favourite bogeymen, the big banks, for failing to get cash flowing.
It is undeniable that progress has been disappointing. Of the 36,000 applications received, fewer than 50% have been approved. A large part of the reason is that the banks are putting these loan applications through their standard processes – sclerotic at the best of times. But who can blame them, given they’re still carrying 20% of the risk and banks are criminally liable if they knowingly make bad loans.
Clearly, the application process needs to be simplified – not least by learning from other countries whose equivalent schemes involve far less paperwork – and the panel of accredited lenders expanded, with fast-moving fintech lenders being particularly encouraged to step into the breech.
Many – including several of Rishi Sunak’s predecessors – have called for more drastic action: a move to 100% loan guarantees, with the Government standing behind the entire debt.
This would undoubtedly get cash flowing more quickly, as there would be no reason for the banks to do any due diligence whatsoever. But would it actually solve the problem at hand?
Even if every application had been processed, and loans granted in a matter of days, credit would only have reached 36,000 companies. Based on current run rates, that would mean something like £6 billion of capital being deployed – out of a budgeted £330 billion.
Yes, some small businesses have stayed away because of their perceptions of the scheme and its effectiveness – but even if there were 10 times as many applicants and they were all successful, only a fifth of the available cash would be distributed.
What this suggests is that these loans simply don’t work for the majority of small businesses – and no wonder. Small businesses in the UK were already wary about taking on external finance –and Covid-19 will only have served to make them warier still.
At a time when your business has stalled, with no reassurance whatsoever about when things might get back to normal, why would you want to take on new debt, even if it’s interest free? How could you feel confident about paying it off?
For so many UK small businesses, margins are tight and cashflow is vital. By leaving them with zero revenues and mounting costs, Covid-19 will potentially render millions of them unviable unless more drastic action is taken.
The CBI has called for a business rates holiday across the board – but the Government should consider exempting all small businesses from business rates for the next six months. It seems deeply unfair to level charges on businesses at a time when it is nigh-on impossible for them to operate.
Equally, why ask businesses to take on more debt when they have no idea when they might be able to open – and make profits – again? The Government should consider a scheme akin to the student loan system where debts only need to be repaid when profits above a certain level are being made – giving businesses confidence that they’re not just throwing good money after bad.
Either of these approaches would show a clear sign of commitment to the small business community and help give them the reassurance which the current set of circumstances requires.
But the Government also needs to act on those costs which it does not directly impose – in particular on rents. At the moment, banks are being strongly encouraged to offer three-month mortgage holidays and other forms of forebearance.
But many landlords are not financed by UK banks, but by institutional investors, asset managers or other finance providers. Forcing a non-bank lender to provide forbearance to their borrowers might save the tenants, but only by putting the lender’s business in jeopardy instead. Those landlords will often risk being in breach of breaking debt covenants if they don’t pay their senior lenders – so every effort should be made to keep credit flowing through the system.
The Government should therefore consider providing funding for a proportion of rental costs for a certain period, whilst uncertainty remains. If the Government does not want to consider paying rents, directly, on behalf of small businesses, it should at least ensure these senior lenders provide relief from any covenant breaches and allow repayment shortfalls to be spread over the remaining terms of the loan.
It’s not just about rents. The furloughing scheme has been a great success – perhaps too successful, according to some reports, but other fixed costs remain. The drip, drip impact of those costs is already leading some business owners – especially small businesses – to decide that enough is enough. At the moment, there is no way for them to press pause, or even reset, on their operations.
So how about, in effect, a ‘mothballing’ scheme? The Government could agree to cover ongoing costs, such as utilities or insurance premiums, for a ‘mothballing period’, until the economy has reopened and these businesses can re-establish themselves.
No one can say for sure when we are going to be over the worst of the Covid-19 pandemic, or when our economy is going to open again. But it is vital that we think about the levers of future economic growth, which means preserving the small businesses that are the engines of new job creation. It will be much easier to kickstart the economy with the existing business base intact than to encourage growth from a smaller base, and the creation of new companies to replace those now being lost.
The current small business community must be at the heart of our economic recovery – which is why it is so essential we save as much of it as possible right now.
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