Covid-19 loan schemes: Sunak failed to spot elephant in the room
Following the Chancellor’s announcement last week (Thursday 24 September),that the application deadlines for the four Covid-19 business relief schemes will be extended and the period for repayment increased, Gregory Taylor, head of financial solutions at MHA MacIntyre Hudson, says the Chancellor has failed to address the fact that lending is still too restrictive.
The Chancellor’s largesse is fine as it stands but still fails to address the long-standing flaw with the Covid-19 loan schemes. Of the four Covid-19 loan schemes (CBILS, CLBILS, BBLS, & The Future Fund) only the Bounce Back scheme (BBLS) is particularly effective at getting help to where it is needed. For the other schemes lending practices are too restrictive, and even good companies with solid growth prospects can’t get a look in.
Across all schemes the overall approval rate is 63%, but this number is skewed by the Bounce Back scheme, which is running at an 82% approval rate. The Bounce Back scheme however only provides loans of up to £50,000 and the more substantial CBILS scheme, which larger SMEs desperately need access to, has a much lower approval rate of 49%.*
One of the best moves government could make to increase approval rates would be to allow banks to make loans at 4 times a company’s EBITDA. This is the tolerance non-bank lenders employ, and would allow many more businesses to benefit. Banks are currently only making loans up to a value of 1.7 times EBITDA, so many businesses are missing out on the support they need.
The Chancellor’s new plan also poses a few questions businesses may be wondering about. Businesses can apply for a six-month freeze on loan repayments but who gets to decide whether this is allowed, the lender or the British Business Bank? Finally, although the Chancellor has permitted businesses to extend the period over which a loan can be repaid to 10 years, we need clarity as to whether this applies to existing loans or just to those taken out after this announcement.
*Source HMRC Covid-19 business loan statistics