Guarantee criteria see banks leave businesses standing at the altar as alternative lenders step up

Carl Jackson looks at the challenges faced by banks and the financial implications of lockdown


by Carl Jackson

Many would be forgiven for comparing the current economic impacts of the Coronavirus (COVID-19) pandemic to that of the credit crunch over a decade ago. 

At the time it was suggested that the permanent damage done to the productive potential of nations across the world was a staggering $200 trillion of which £7.4 trillion was estimated in the UK. The longer the lockdown continues, intuitively, it feels like the financial implications may not be wildly different this time round.

However, the challenges faced by the UK Government today are surely greater than those of 2008. 

Admittedly, the bank rescue package then was a more significant £500 billion compared to the £330 billion pledged back in March for COVID-19, but the solution was arguably a more obvious one as steps were taken to restore confidence by stabilising the stock market and shoring up the UK banking system. The steps taken by the Government and the Bank of England to introduce the Special Liquidity Scheme and Bank Recapitalisation Fund at that time have been totally vindicated and one hopes that the current strategy deployed will be of equal success.  

This current world pandemic however, is very different with it affecting daily life and industry in equal measure with many businesses cocooned and swathes of the nation furloughed or working from home as saving lives takes priority. The Government have once more been front-footed with cash on the table in its various forms with banks deployed to distribute corporate aid that will have undoubtedly been viewed as a reassuring salvo for UK plc as the Prime Minister’s financial pledge echoed around Downing Street.

Well, for many businesses this will have been the simple message received but a number of weeks in and with applications for the Coronavirus Business Interruption Loan Scheme (CBILS) underway, the Government pledge is seemingly not fit for all as many businesses are left standing at the altar and jilted by banks as an increasing number of applications are rejected.

However, one must remember that the credit crunch of a decade ago was underwritten by the Government as a rescue package for banks but with the full expectation that financial support would be repaid and a favourable return achieved for taxpayers. Not dissimilarly, the same applies to CBILS where there is a need to repay the loans afforded to businesses. However in order for banks to call on the guarantee element provided by the Government in the event of default, the criteria for approving the loan must be met. As would be expected, banks are approaching CBILS applications with a responsible lending approach which will apply rigour around the potential risk of default as well as the ability to service debt. Consequently, the ratio of successful and unsuccessful applicants is wildly out of kilter.

In recognising this gap and the potential knock-on effect to businesses that may also utilise the more flexible alternative lending market, a second wave of unsecured loan providers, asset-based lenders and niche financial services businesses have approached the British Business Bank seeking accreditation to offer CBILS themselves. This has been with the intention of providing support to existing portfolio clients. For reasons already remarked, whilst this may push up the number of successful applicants, overall, the majority of these lenders remain cautious of not wishing to expose themselves to potential increased provisioning during these uncertain times.

It’s therefore feared that CBILS will fall worryingly short of delivering the level of support originally intended and many have commented that the small to medium-sized enterprises (SMEs) will be hardest hit amongst industry. The recently announced Bounce Back Loan Scheme  offering up to £50,000 to address this discord amongst the SME community will be well-received but is unlikely to address the ever-widening cash flow gaps that are now appearing in most businesses.
 
It is of course, not just a question of meeting the commitments of today, but also needing to consider the wider cash implications of tomorrow and the ability to access the continued supply of goods when historic trade creditor debt has hardened. There is also a more general concern that once normality resumes, whilst there may be degrees of forbearance on overdue debt, the expectation around repayment terms won’t match the underlying debt servicing abilities of a business. Therefore, there is an air of inevitability that businesses will be faced with: the need to either raise additional investment where possible; or face the prospect of needing to consider restructuring options. 

In recent years there has also been more commentary on the level of personal and unsecured loan debt in businesses, with many only just managing to keep their noses above water. With the recessionary climate and future uncertainty, default rates are expected to increase markedly and with it, the prospect of wholesale personal guarantee implications as more businesses come under strain due to their excessive level of gearing. Consequently, both personal and corporate insolvencies are likely to see a noticeable uptick in the year ahead.