Over the past fortnight or so, there has been a great deal of press coverage and asset finance industry debate over the efficacy of the Government’s Coronavirus Business Interruption Loan Scheme (CBILS) that is administered by the British Business Bank. At a time when a sizeable minority of Britain’s 5.9 million small businesses are struggling to survive, only a few thousand firms appear to have obtained CBILS support.
There has been comparatively little attention on another lending support option that may prove more relevant to many asset finance providers (banks directly and non-banks indirectly) and is opening for drawings tomorrow (Wednesday, April 15).
CBILS - the rebadged Enterprise Finance Guarantee - protects lenders for 80% of losses after recoveries, subject to a portfolio cap and a fee that is paid by the lender. It is an important tool in Government support for SME lending, but it doesn’t transfer enough risk to Government to persuade lenders to set aside their usual due diligence requirements.
Perhaps the Enterprise Finance Guarantee should never have been renamed as a Business Interruption Loan Scheme. Changes, such as making the loan interest-free for an initial period, cannot transform a shared risk scheme for marginal business loans into something far wider.
There are growing calls for Government to move further and accept more lending risk in the short term, in order to save businesses and help prepare for a potential return to normality. This is the US approach, where the Small Business Administration is offering grants and interest-free loans to small businesses to help overcome the temporary loss of revenue they are experiencing as a result of the COVID-19 pandemic. This support for the 30 million small businesses in the US may reach $350 billion, it has been estimated.
Without such a boost to Government support, we can hope that most businesses will get through this by hibernating, putting staff on furlough, and putting on hold as many bills as possible. However, what seems critical is to support businesses that:
Cannot hibernate (e.g. they might need to continue trading through the shutdown or have no realistic options for adequately reducing costs) and are still likely to be viable when we the shutdown eventually ends, so need immediate cash funding
During the recovery phase are ready to invest again but are unlikely to be able to fund using cash so will be looking at asset finance options.
A new option that could help is the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME). Tomorrow’s launch is sooner than the BoE had previously announced.
At first look, the TFSME might not look so interesting. It doesn’t provide any lending risk support to lenders and only certain banks can apply (although others can be expedited through the qualification process). It does, however, deliver the following:
Four-year funding to banks, at or close to base rate of 0.1% at present (the exact rate will vary according to the total volume of eligible lending, incentivising banks to lend more to SMEs)
Ability to borrow £5 for every £1 of additional lending to SMEs
Ability to use asset finance as eligible collateral, with clear qualification criteria available online
TFSME creates strong incentives for banks to find ways of getting more money out to SMEs, and the low funding cost without a cap on lending rate provides some degree of cover for extra uncertainty.
What about non- banks? Non-bank asset finance providers are able to reach many SMEs that, for whatever reason, don’t borrow from their banks. They do this partly through a network of over 500 asset finance brokers across the country, some of whom have developed to manage their own books using block funding arrangements.
Lending to non-bank financial institutions is possible, but this would not qualify as SME lending, so the incentives to lend are less favourable. Perhaps that’s something that could be discussed with the Bank of England, so that lending that is clearly being passed through to SMEs is treated as SME lending. Alternatively, non-banks could originate and manage lending to SMEs that is funded directly by the participating banks, allowing the full benefits of SME lending under the Scheme.
Either way this is likely to need cooperation between banks and non-banks, and that’s the rub. After the global financial crisis, this is exactly where we got to on the equivalent Bank of England Funding for Lending Scheme. The problem then was that those responsible for the Scheme in the participating banks weren’t familiar with the structure of the asset finance market. By the time the right discussions started, the need had largely gone away. Cashflow finance providers, including relevant fintechs, have the most urgent need for access to TFSME funding, so they can target inexpensive loans to the many good businesses that are so close to the edge today. The broker network is the perfect distribution channel for this.
For asset finance, the demand for new funding will only really come after business life begins to return to normal. When that does happen, and we all hope the time will come soon, funding for non-banks could still be restricted by delayed collections on the existing book. To be prepared, there needs to be discussions now between asset finance companies and the banks able to access the TFSME.
Fortunately, banks now are far more used to working with external partners including asset finance businesses and fintechs. The entire SME funding industry is demonstrating that it is determined to play its part in the battle against Coronovirus. The question now is whether firms across the industry can collaborate and innovate to find the optimum ways of distributing the much-needed Bank of England TFSME funding.