As UK businesses move from survival to recovery in 2021, there is a danger of a new credit squeeze and funding gap

Rangewell, who since the first lockdown have received offers or closed transactions with 33 different lenders and signposted over 4000 SMEs to appropriate CBILS providers, have analysed the sector-specific economic data during the Coronavirus pandemic.

The business finance experts found that as we move into 2021, the Government needs to support business financiers to encourage a wider array of lending.

The report finds that the majority of sectors are moving away from survival to recovery. This is due to the great success of the Covid support loans.

The new challenge for the Chancellor is how to support business with recovery, as well as continuing to help them survive. The data is clear, there is a need for new Government schemes to encourage long-term credit facilities.

The Office of National Statistics and British Business Bank data show the taxpayer-guaranteed Covid loans have been a huge success and, whilst it is correct to extend the scheme, the Chancellor should look to stimulate other lending products to give the economy a booster shot.

Rangewell has learnt that whilst banks are lending, it has been almost solely concentrated on the Coronavirus Interruption Loan Schemes as opposed to a wider selection of products such as invoice finance and overdrafts.

One lender reported a 3% increase in its total lending in 2020 due to their involvement in the government’s Coronavirus Loan Scheme but this was away from their core invoice finance products.  One independent SME broker writes that, allegedly, one major bank has not unwritten a new Invoice Finance loan since April 2020.

The trouble with the Covid Loan Scheme consternation is that 93% of taxpayer-backed lending has been with the Bounce Back Loan Scheme; a low-value, short-term loan. The danger is that the only credit available to firms is this emergency funds and only from the Banks current client bases – this means without action there will be a credit squeeze and funding gap.

Most firms looking to recover and diversify (than just survive) will be looking for more flexible, long-term products such as invoice or asset finance, or even the good old-fashioned overdraft. The best way to diver this is with an active marketplace of lenders and products.

To solve this, Rangewell is calling on Rishi Sunak to:

• Continue the Coronavirus Interruption Loan Schemes for all of 2021 or longer if the restriction on trade, commerce and travel continues into 2022 or beyond. The intention of this will be to help those firms who need funds to survive in the short term.
•  As reports of a new EFG-style loan scheme emerge, ensure this scheme does not turn into a survival program for struggling businesses but a way to give lenders confidence with partial taxpayer guarantees to support those businesses looking to grow with more long-term credit. This scheme will help financiers to lend and end the non-CBILS credit squeeze.
• Introduce a new ENABLE funding programme. ENABLE was a wholesale money program for non-bank lenders (lenders whose source of money is not deposited) after the 2008 credit crunch. The program will see the Treasury lend money to financiers which can then be distributed via the new EFG-style loan scheme to SMEs. The returns could go some way in neutralising any taxpayer losses in the EFG-style scheme. One of the largest barriers for lenders currently is their pipeline, not just the lack of physical funds but the risk covenants associated with institutional funds.

Nic Conner, who authored the report and is Rangewell’s Research Consultant, said:

“We are in danger of a new credit squeeze in 2021. Lenders are currently lending to businesses but almost all from the Covid support schemes; with 93% made up from the Bounce Back Loans. As firms move from survival to recovery in 2021, the Treasury needs to help lenders, particularly non-bank lenders, in getting funds to British businesses.

 The Coronavirus Business Interruption Loan Schemes have been hugely successful and credit to the Chancellor and the financiers in getting these schemes in place so quickly. The taxpayer-guaranteed loans have not only saved firms and jobs, but entire industries. As we move onto the next phase, these emergency loans must continue throughout 2021 but must sit alongside other credit facilities. 

The trouble with lending being so concentrated on the Covid schemes is that it will create a funding gap where firms in a strong position and who will be looking to expand and diversify in 2021 will be ushered into Covid emergency loans, which are just not appropriate for them.  

Rishi Sunak needs to put in place a new partially-guaranteed scheme which will help financiers to offer more mature, long-term products like Invoice Finance, Asset Finance or the good old-fashioned overdraft.  

In 2019, I found out that banks had scaled back the amount they lent to SMEs in overdrafts by 50 per cent since the 2008 financial crisis,  but flexible facilities like the overdraft will be key for businesses looking to grow from the canyons of economic downturn. The Chancellor needs to encourage this type of lending.

For the UK to move forward, we need an active lending market so, in addition to a new partial taxpayer-backed scheme, Rishi Sunak should introduce a wholesale money program for non-bank lenders. Not only will this money give financiers the security of offering a wide array of competitively-priced finance products, but the returns could go some way to neutralise any losses (and very possibly be profitable) to the Treasury.  

The business finance specialists have found that: 

It is clear from the Office of National Statistics reports that we are seeing a mountain range of economic recovery. When the UK has tight restrictions, business performance dips into canyons of low- to no trade. As soon as restrictions are eased, we see a sharp upturn with peaks closer to February levels of business activity.

• All industries saw a dramatic drop in GDP at the start of the pandemic. Some sectors struggled to return to their February levels, whilst others saw their output bounce back to their pre-March levels by June.
• As restrictions came into force throughout the UK at the start of November, the percentage of businesses experiencing a decrease in turnover increased sharply – 50% of businesses experienced a lower turnover to what is normally expected for the beginning of December.

By the beginning of December, businesses, on the whole, had a greater belief that they would survive the next three months. This is supported by the fact that the majority of businesses have over six months’ cash reserves.

• 43% of businesses have high confidence that their business will survive, whilst 36% say they have moderate confidence and 9% say they have low confidence. Only 3% say they have no confidence whatsoever that their business will survive into the first three months of 2021.
• 5% of businesses have no cash reserves, 4% have less than one month, 22% have between one to three months, 16% have between four and six months and 36% have more than 6 months’ cash reserves.

The Government’s fully-guaranteed Coronavirus Business Interruption Loan Schemes have been hugely successful. 

• 31% of all businesses have said they received a government-backed loan during the pandemic.
• Exuding the Future Fund, by the beginning of December 2020, £68.1bn worth of CBILS were lent to 1.5m British firms.
• The most successful program has been the Bounce Back Loan Scheme, accounting for 93% of all Government-backed lending. Of those who received a Bounce Back Loan, 4% have successfully gained a top-up.

For more information, please visit the Rangewell website.