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SMEs in the UK find relief in lending

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The government has widened the scope for SME lending through state-backed schemes and programmes to sail through the crisis

Consider a few optimistic and interesting facts for the new year: The UK plans to implement new state-back loan schemes worth £10 million with full government guarantee to replace Covid support. What this means for SMEs in the country is that the permanent replacement for the $65 billion Covid programme with the new state-backed guarantee will support banks’ lending to a wide range of businesses of that scale. Although the Treasury officials are yet to finalise plans, the new scheme could offer a guarantee of up to 80 percent for loans worth up to $10 million to businesses that are deemed to be viable—yet unable to receive financial support from their lenders.

The pattern of not being able to obtain finance has forced several SMEs in the country to postpone their growth plans and are bearing a significant portion of the damage. Certainly, the coronavirus pandemic has weakened the UK’s economic outlook and going by the fact that SMEs are the lifeblood of the economy—the lending opportunities must not be derailed.

Last June, McKinsey published an online study of SMEs only to find that the UK economy was ‘very or extremely weak’ at the time in the views of more than half the respondents; meanwhile, others expected ‘market stagnation or recession’. But these perceptions were likely to reflect their own business performance, the study reports. It is an understatement to say that the effect of the pandemic coupled with Brexit on the UK economy is intense. Of surveyed respondents, 80 percent reported ‘stable or growing revenue’ for the year prior to the pandemic.

If the new loan scheme is implemented, then having a positive impact will be a sure thing. It might not transform the lending system overnight, but it will represent something for SMEs. Banks will be given the opportunity to set the interest rate for new loans, however, it is reported that the interest rate is likely to be capped at 15 percent. The government’s extended efforts to support SME lending is commendable, but there is a deep-rooted concern on whether they will only have a bandaid effect on the issue. For example, the concern is reported in a manner that interest rates on the loans potentially reaching up to 15 percent is likely to be a temporary fix to a growing problem in the big picture. It is undeniable that investment into SMEs in the country is imperative to assist them in their post-pandemic recovery.

One thing that must be notified is that the majority of companies in the country are SMEs. In 2018, the parliament identified 5.7 million SMEs which accounted for 99 percent of all businesses in the country. Breaking down the calculation further points out that 5.4 million were micro businesses with 0-9 employees which accounted for 96 percent of all SMEs in the country.

Perhaps this is an indication that SMEs can save local economies if they are nurtured well, and that collectively represents something for the country. This idea can be supported by the fact that it prevents creation of lopsided distribution of wealth and income by bringing innovation and growth to areas outside the big cities. Last year, it was found that SMEs employed 16.3 million people, contributing to 60 percent of all jobs in the country, which ties into the reasoning that they are significant contributors to the economic growth of local economies of South West England, Wales and Northern Ireland. In those local economies, SMEs accounted for 70 percent of jobs in the private sector.

Last year, the government loaned $41 billion to SMEs which is considerably a huge amount to payback, especially given that the pandemic has stirred so many uncertainties for the global economy. However, it seems that private capital has proved to be beneficial in helping SMEs in the current state of circumstances. It is reported that investment into SMEs and the extension of the Enterprise Investment Scheme and loan support schemes might be more vital to the SME lending ecosystem than other government loan schemes.

More recently, data published by UK Finance, a trade body for the UK banking and financial services industry, observed that the gross lending to SMEs in the first quarter of 2020 reached £54 billion, which is more than double the annual total of 2019. A report published by Ernst & Young made an interesting observation which might suggest differently. The pandemic is expected to see business lending grow by 14.4 percent last year, which marks the highest level in 13 years. Extending bank finance has been important to corporates and SMEs in the country, and the forecast shows that businesses will begin repaying their additional loans in net terms and reduce borrowing levels from 2022.  The pandemic is having a different impact on SMEs in contrast to the 2008 financial crisis. It seems that lending has continued at record-high levels aided by government-backed schemes, resulting in annual growth from 0.6 percent last February to 11.1 percent last May.

Scott Donnelley, CEO of CapitalBox, in an interview with International Finance, tells us about the SME lending play in the UK amid all crises and the role played by government-backed schemes in making lending effortless.

What is the current state of development in the UK SME lending keeping in mind the excruciating factors such as pandemic, Brexit and economic downturn? 

Our data highlights that throughout the summer months, with the impacts of the pandemic’s economic downturn, SME lending was at a standstill in the UK. Today, we see this figure rise towards an expected level, with the exception of high-risk industries like hospitality and travel. With the obvious and urgent need for funding in these industries, due to lost revenue streams, many are turning to alternative lenders to meet their obligations.

Can you elaborate on the effectiveness of the government-backed bounce back loan scheme for businesses losing financial strength?

The bounce back loan scheme is a lifesaver for healthy small businesses who do not have deep balance sheets to weather the lockdown and accompanying loss of revenue. This is a lifeline for them, to be able return to some sort of normal running of their business and rebuild when possible. With thousands of businesses applying to the first bounce back loan scheme there were certainly challenges to overcome and there are lessons to be learnt if the second phase is to be executed effectively—especially when it comes to equal access for SMEs to the loan, which hundreds of thousands were refused the first time around.

How are UK SMEs performing amid the economic and global challenges this year? What is your outlook for them over the next one year?

I think businesses are motivated and ready to rebuild. This is an artificial downturn for the economy, not a structural economic recession—but nevertheless downturns stimulate innovation. Adapting to a new climate involves agility, creativity and determination, adding to an entrepreneurs problem-solving toolkit and instilling the kind of business discipline that will continue to reap benefits long after the pandemic.

It is reported that 250,000 SMEs are struggling to access bounce-back loans. In your view, what are the main reasons for the lack of access?

It is important to remember that not every business was healthy before the pandemic struck. Unfortunately, the mortality rate for small businesses can be high even without Covid-19. There were basic limitations in the program for companies who were struggling prior to the pandemic, for example, perceived risk acting as a barrier to a loan. Technical glitches, errors and delays within the scheme meant that thousands of SMEs were waiting for long periods of time for their loan, some still are. We must make sure small businesses have access to funding so that they can stay afloat during this second wave.

NAO has warned businesses of loss on bounce-back loans, with up to £26 billion on the government’s most popular Covid-19 business loan scheme owing to fraud or inability to pay. What measures must the UK government take to widen business access to financial loans? 

The UK government had the right idea with the bounce back loan scheme, but unfortunately a helicopter money approach is doomed to some exploitation.  However, this is a price worth paying.  It was, and still is, important to get money out to those SMEs that need it to survive.  The alternative of allowing massive insolvencies and unemployment could have triggered a full-blown depression.

 In your view, what are the range of protections that must be implemented to protect bounce-back loans against financial mishaps and enhance transaction monetary controls? 

As we learn from the first bounce back loan scheme, we must understand that loosened but prudent underwriting and fraud controls must be in place for any loan scheme to work. Banks and alternative lenders have to work together alongside the government to guarantee businesses who previously applied to non-bank lenders are not denied the finance they need to get through the end of 2020. To put it frankly, the bread-and-butter basics of lending still apply.

How do you foresee Brexit to affect SME lending this year? Will it even reduce access to business loans and impact the potential of bounce back loans for 2021? 

I think Brexit has become commonplace in people’s minds, there will be no big sudden shock and therefore SME lending should not be reduced. However, there will be some caution around export heavy businesses, but ultimately I believe in the resilience of the economy to boost business growth in 2021.

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