A firm feeling we can't count upon Sunak's loan scheme

News and social media are jammed with reports of firms still waiting for furlough and loan payments desperately needed as we continue in lockdown with no prospect of restrictions easing until May 7 at the earliest. The general feeling is there’s a lack of urgency in delivering this emergency financial support, which to date has largely been channelled through the big high-street banks.

Chancellor Rishi Sunak unveiled the Coronavirus Business Interruption Loan Scheme (CBILS) in his Budget on March 11 as part of an initial package of measures to ease the economic blow of the Covid-19 outbreak. Available to firms with annual turnover of up to £45 million, the scheme provides up to £5m to qualifying businesses, with the Government guaranteeing that lenders will get 80% of their money back if the borrower can’t repay.

CBILS went live on March 23, but after less than two weeks in operation, further overhauls were necessary. This included scrapping the requirement for businesses to prove they have no other source of funding, and a ban on personal guarantees that could put the homes and other assets of business owners at risk.

Yet for all the sound and fury, it remains clear that CBILS is so far failing to deliver. UK Finance – the trade association for the banking industry – was at great pains earlier this week to cast the latest CBILS lending numbers in their most positive light. Its figures show that as of Tuesday, a total of 6,016 loans worth £1.1 billion had been issued.

During the seven days to April 14, the number of firms approved for CBILS lending nearly doubled, with the £700m of loans approved up by 150% on the previous week.

But put into context, this means nearly four out of five of the 28,461 formal applications for CBILS are still pending. And that doesn’t include an estimated 300,000 informal enquiries, which has prompted the Federation of Small Businesses (FSB) to ask why so many are dropping out at the application stage.

Furthermore, UK Finance has not put a figure on the number of rejected applications, so there lies yet another unknown.

If 6,016 applications from throughout the UK have been successful, it’s fairly safe to assume that only a few hundred of those – perhaps about 500 – have been made by Scottish firms. Yet, according to figures from the Scottish Government, there are more than 354,000 SMEs in this country providing an estimated 1.2 million jobs, the majority of which are currently under threat.

If Government measures are to succeed in salvaging the economy, the number of CBILS approvals needs to start rising at a pace akin to Covid-19 infection rates. As Sunak said on Tuesday, “it’s vital that we continue this upward trajectory”.

It has been argued that because the Chancellor has only guaranteed 80% of the loans – leaving high-street banks to pick up the remaining 20% if the money is not repaid – those banks are not acting as an effective conduit for the money. One popular quick-fix suggestion is for the UK to follow the example of other countries such as Germany in guaranteeing 100% of CBILS loans.

The fear with this approach is a potential increase in fraud, as well as the danger of cash getting pumped into firms that were already failing pre-Covid. The reason the banks have been given a small share of the risk is to ensure that in handing out Government money, they perform their fundamental task of vetting applicants, thus protecting the public purse.

Before the Government changed the rules on CBILS lending at the start of this month, banks were being told that applicants had to be “creditworthy” to receive money. In normal times, this would include evidence of the strong cash flow that virtually no business has right now – an impossible circle to square.

Another part of the problem is that many of the firms in the greatest need of assistance are of a size that traditional banks don’t normally lend to. These are the micro-companies employing up to 10 people, which typically don’t have the assets over which to secure a loan.

And finally, there’s the sheer scale of the task that the banks have been landed with at a time – as they rightly point out – when their own operations and staffing levels are being disrupted by the pandemic.

There are an estimated 1.6 million microbusinesses in the UK, which equates to hundreds of thousands of small loan applications for sums of less than £25,000 per CBILS lender. Put simply, the high street banks have neither the technology nor resources to deal with that level of volume.

This is where the fintech industry argues that it could make a substantial contribution. Already accustomed to dealing with smaller firms through online channels, they say they could be the most efficient means of getting emergency support to SMEs.

Last week, OakNorth Bank and Starling Bank became the first two fintechs to receive CBILS accreditation, while peer-to-peer lender Funding Circle got its accreditation on Friday. Now will be their chance to make good on those claims.

So is it time to return to the days of bashing banking’s big boys?

It’s tempting as an easy out, but would be a gross simplification of circumstances that are both complex and quickly evolving.

The public crucifixion of banking executives following the 2008 financial crisis was a natural and largely justifiable backlash against an industry whose internal failings unleashed deep and widespread damage on the lives and livelihoods of hundreds of thousands of people.

Covid-19 will be even more devastating, but it is not a crisis of the financial sector’s own making.

That’s not to say that questions shouldn’t be asked, nor failings be glossed over. Rapid action and fast adjustments will be required for the economy to survive this current pandemic, and that demands proper scrutiny across the board.