The Treasury is considering introducing 100% government-backed rescue loans for Britain’s smallest companies after the slow take-up of bank lending by businesses during the Covid-19 crisis.
The chancellor, Rishi Sunak, is believed to be close to making a decision about adapting the current scheme, which has come under criticism in the last week from business lobby groups, former chancellors and the governor of the Bank of England.
Thousands of businesses have complained that the Coronavirus Business Interruption Loan Scheme (CBILS), which is run by the British Business Bank, is cumbersome and includes financial hurdles that many businesses are unable to overcome. Currently, the government underwrites 80% of the value of the loan but is now giving serious consideration to raising that to 100%, in a development first reported by the Financial Times.
The Institute of Directors has joined the CBI in calling for 100% state-backed loans to circumvent onerous commercial bank lending rules, saying this would unlock a system that is currently expanding at a slow crawl.
The former chancellors George Osborne, Norman Lamont and Sajid Javid and the shadow business secretary, Ed Miliband, have called on Sunak to move to 100% government-backed business loans.
The Treasury has already had to change its criteria to get money out more quickly to businesses that may otherwise fail to survive the lockdown. It has banned personal guarantees that put business owners’ property at risk, and scrapped a controversial requirement for banks to offer loans at commercial interest rates – reportedly as high as 12% – to any eligible businesses before offering a CBILS application.
The latest weekly data released on Thursday by the banking lobby group UK Finance showed that lending under CBILS had reached 16,624 companies, which accounts for just 40% of the 36,000 formal applications lodged with banks so far. However, the amount of lending to small and medium-sized businesses under CBILS has more than doubled to £2.8bn over the past week.
While approvals have increased from a rate of 21% a week earlier, critics are still concerned that banks are not able to get money fast enough to businesses that need it most.
Germany and Switzerland have pushed out tens of thousands more loans to businesses after putting in place standard forms and common criteria for high street banks to follow. France has agreed €20bn (£17.5bn) of loans, which have a 90% state guarantee, to more than 170,000 businesses and expects to process a further €20bn by the end of the month.
However, senior banking executives have played down the likely impact of the government giving 100% backing CBILS loans, claiming it would make no difference in the pace of approvals.
“It wouldn’t have the impact that people think,” one senior banker told the Guardian. “The agreement with the government is very clear: we have to do our appropriate due diligence and ascertain that the business was a viable business pre-Covid.”
UK regulations also require small business customers to undergo affordability checks so banks do not saddle them with an unaffordable amount of debt. Sources said those extra checks have “put off” some banks from offering loans worth less than £25,000.
“So even if the government said [they would back the loans] 100%, the banks shouldn’t really be acting massively differently. I don’t think it would be good behaviour.”
An executive at another major high street bank said the discussions about higher guarantees were a “distraction” in a wider debate about whether governments should be handing money directly to businesses.
“An alternative would be a grant scheme where customers end up self-declaring their financial position through an application,” the banking executive said. In that scenario, banks would serve as a processing hub for government cash.
“That’s a very different scenario which would be quicker for a borrower to access but clearly there are big implications in terms of what risk does the public sector and taxpayer take in this type of market,” the executive said.
“If you want it to be quicker, faster, more straight forward, you therefore need to move away from the banks undertaking those credit checks,” he added.
State loans around the world
Washington’s Paycheck Protection Program is almost a hybrid of the UK’s CBILS and furlough schemes, providing forgivable loans that are meant to support worker pay.
The PPP offers small businesses with less than 500 employees loans to cover staff wages for eight weeks, though a smaller portion can be used for mortgage interest payments, rent and utility costs, even if the companies remain shuttered. If all the criteria are met, the loans – which otherwise come at an interest rate of 1% – do not have to be repaid.
The PPP was originally allocated $349bn (£305bn) but was increased by $320bn after the initial funding ran out out within two weeks of the scheme opening. More than 1.6m firms had loans approved.
France has so far agreed €20bn (£17.5bn) of loans to more than 170,000 businesses. It expects to process a further €20bn by the end of the month.
In total, the government is backing up to €300bn of bank loans, with state guarantees ranging from 70-90%, depending on the size of the business.
The loans are available to all firms, regardless of size, and are usually worth up to three months of the company’s revenues in 2019 and do not have to be repaid for up to 12 months.
Like the UK, business are also being supported though a deferred tax payment arrangements and the government is also providing state subsidies for worker wages through employers during the lockdown.
The French government has said it is willing to nationalise French companies if necessary.
Businesses have been able to apply for loans of up to €1bn, which are 80% and 100% guaranteed by the state depending on the size of the firm.
The loans, which come with interest rates as low as 1%, are available to struggling companies that were viable before the Covid-19 outbreak. Depending on their size and creditworthiness, companies can access up to €1bn in emergency funding.
While the process was working well for small businesses borrowing up to €3m, reports suggested there were initial difficulties in getting some loans out to larger firms. However, those hiccups seem to have been temporary.
Authorities have also had to deal with fraudsters trying to exploit the generous programme, which has forced some German states such as North Rhine-Westphalia to temporarily suspend payouts.
The total number of state-backed loans now approved in Germany – including between startups, medium-sized businesses and large companies – has reached 17,906 with €10.3bn (£9bn) granted to date, according to the German economic ministry. About 18,170 business have applied for emergency financing to date.