This is an edited version of a blog published on 31 March 2020 (see https://www.linkedin.com/pulse/solving-how-problem-non-banks-support-small-business-lending-rose/)
In a piece published by Conservative Today on Saturday, former Justice Secretary David Gauke discussed the many challenges faced by Government in dealing with Coronovirus.
He noted: “A further challenge for the Government is that there are plenty of things which people are demanding be done immediately which is just not operationally possible. Most journalists and politicians spend their time focused on the questions of ‘what’, ‘why’ and ‘who’ but the most important question at the moment is ‘how’.”
I think most readers would agree that what the Chancellor has already announced in terms of economic support is unprecedented, remarkable in scale, and generally very logical. Yes, there are gaps of course, but it’s usually easy to see why the ‘how’ part of what’s being called for to fill the gaps is so difficult for the Government to address.
The key gap for businesses likely to need new finance, either right now just to keep going, or hopefully a little later to catch up on investment, is Government support for lending through non-banks. Solving the ‘what’ is easy: Open up support to non-banks that can reach SMEs that may not fit the lending criteria of banks. The ‘how’ is the tricky part.
Non-bank finance companies aren’t eligible for loan guarantee support as borrowers through the British Business Bank’s Coronavirus Business Interruption Loan Scheme (CBILS) nor for the low-cost funding available to support new lending through the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME). [Correction: Non-bank finance companies are eligible for up to £5m support via CBILS - see comments at end of article]
I won’t focus here on CBILS. That Scheme, which is a re-badged version of the longstanding Enterprise Finance Guarantee, is clearly focused on direct lending to non-financial SMEs. It doesn’t feel to me the natural place to start to solve the ‘how’ on opening up Government support for lending through non-banks.
Instead, I would like to contribute a few thoughts on the TFSME, based on some experience after the 2008 financial crisis with the Bank of England’s Credit Guarantee Scheme, National Loan Guarantee Scheme and Funding for Lending Schemes. All of these were designed, in different ways for different needs post 2008, to help ensure banks had the funds and right incentives to keep lending to businesses.
As with the TFSME, only banks could access the schemes. Non-banks called for access, and the BoE listened carefully to the ‘what’, ‘why’ and ‘who’ arguments. The problem for the BoE was the 'how'. How could they, with great pressures on their resources, judge which firms could access the funding? How could they be confident the money being lent would be repaid?
The BoE did at least widen the scope of support to include all members of banking groups (and the same wording has been carried forward to today’s TFSME) but it never found a solution to 'how'.
I hope the ‘how’ can be addressed now, although it's clearly even more difficult with the additional constraint of not being able to meet institutions in person. Non-banks have a vital role to play in reaching smaller SMEs in particular. This has just been recognised in the USA, where fintechs are eligible to participate in at least some of the new support schemes announced last week for small business lending.
In case there isn't a ready answer, I suggest it’s also important to recall the discussions that took place around 2010/2011 on the same problem, that led to a theoretical stop-gap solution. This didn’t lead to any lending as far as I’m aware, although some useful discussions were held between banks and other lenders.
The question then was whether banks could distribute funds obtained through the Bank of England schemes through non-bank lenders. The basics wouldn’t change, i.e. the bank would always be the lender or lessor for accounting and responsible for paying back the funds. However the non-bank leasing company could originate, bill and collect, so continuing to serve their existing customer base and any specialisms they have in the market.
The concept is similar to well-established undisclosed sale of receivables practices in some parts of the leasing industry. To set up larger arrangements along these lines would be a huge challenge involving the most forward-thinking banks, lessors and (last but not least) advisers who would need to coordinate the different firms whilst ensuring compliance with competition rules.
Is this stopgap just too complicated? Lessors are making massive efforts to support their existing customers, with best practices including offering payment holidays free of unnecessary bureaucracy to clients needing this support. Meanwhile asset finance brokers are working flat out to help their clients set up such arrangements with lenders, without earning any fees, and for some smaller brokers this can mean setting aside genuine doubts whether they will still have a viable business on the other side.
Building on this determination within the industry to work through the current problems, together with some additional guidance and support from the Bank of England, I believe a solution to the ‘how’ problem can be found. This could open the door to non-bank finance companies distributing TFSME funding to large numbers of SMEs that might otherwise be excluded from this vital financial support.