On 5th May, The Corporate Finance Network researched its accountancy members to ascertain their latest experiences of attempting to secure a Coronavirus Business Interruption Loan (CBILS) for their SME clients. Despite the much-heralded launch and apparent success of its younger sibling, the Bounce Back Loan on 4th May, CBILS still plays an important role in the rescue and recovery of more sizeable SMEs, who would require a greater cashflow injection to support them, than the £50k maximum Bounce Back Loan can currently provide.

UK Finance, the trade body of the Banking Industry, reported on 7th May that their members had approved £5.5bn of CBILS loans, for 33,812 businesses in the six weeks since launch, with an average lend of £164k.  HM Treasury reported on 9th May that lenders had approved almost £5bn for 160,000 businesses in the first three days of the scheme, equating to an average loan of £34k.  There is quite a difference in results, indicating that the banks’ resources and systems are clearly able to make decisions and lend at speed when they are required to. 

The research from The Corporate Finance Network (CFN) was collected from nine, regional accountancy firms who advise around 9,000 SMEs between them (turnover £0.5m – £10m).  The CBILS loan parameters would fit the typical lending requirements of their client base perfectly.  Only a few clients have applied for a Bounce Back Loan as these are usually too small in value to be of significant use for most of these business clients, especially when acceptance for a BBL would then remove your ability to obtain a CBILS loan at any later point.

Lack of appetite to apply

Our research showed that only 1.4% of clients (126 out of 9,000) had even opened a discussion with their accountant about the CBILS scheme (as reported here by Mail on Sunday). So far, the vast majority of businesses are not convinced they wanted or needed a loan.  Only 46 of those 126 have gone on to submit an application to a lender.  The remaining clients either felt that the process was too onerous (the application forms from the majority of lenders were very unwieldy when the scheme was first announced) or they have decided to wait until they understand more about future likely trading conditions, when lockdown measures are eased. Accountingweb covered the story of the delay and poor response of the banks in an article here.

Difficulty obtaining a decision

Accountancy firms are reporting very few outright declined applications so far, perhaps because as experienced corporate financiers, they are only likely to approach lenders with funding proposals which they know will be most likely be successful.

Of the 46 applications which have been submitted, only 43% have received an approval and decisions are still pending (or sometimes firms are still waiting for meaningful contact from their bank to be able to even open discussions) for 57% of cases, as reported here by The Times.

It is clear from conversations with bank managers that they are still inundated and, despite assurances from UK Finance by the seven largest SME lenders, they have not substantially changed their underwriting procedures.

“Following the changes to the scheme announced today lenders will only ask businesses for information and data they might reasonably be able to provide at speed and we will not require the provision of forward-looking financial information or business plans from businesses applying for CBILS-backed lending, relying instead on our own information to assess credit and business viability”

One manager had 50 CBILS applications on her desk which she hadn’t even started to look at, and, apart from Funding Circle, all banks were still asking for cashflows and were discussing a business’ future viability/affordability.  This contradicts their commitment and statement above, published on 27th April, and is contributing to the slow delivery of these loans.

Funding Circle, whilst it has a fairly slick CBILS application process, is only approving the best applications and not discussing reasons for declines – probably due to the restriction of their cost of capital compared with BBB’s max 8.9% APR and the lack of internal resource compared to the bigger lenders.  So, as much as it was hoped fintech could be the white knight and show the traditional lenders how to process these loans more effectively, it is clear that, without an alternative source of capital, perhaps being injected by the British Business Bank directly, they are not able to provide the volume and scale which the economy will require, at rates which businesses will be willing to risk they can afford.

Opinion by Kirsty McGregor, Founder of The CFN

CBILS aren’t working very well and Bounce Back loans may not be enough for most SMEs.  But CBILS needs to remain part of the solution and so they have to work much better, if businesses are able to feel they can trade through this critical period.  The next few months are likely to be the toughest period most entrepreneurs will ever experience in their career and the country needs them to persevere and not give up.

At the moment, the UK economy is relatively sheltered from any commercial reality, as suppliers are still extending credit, lenders are being very reasonable, the Government are paying furloughed wages, and landlords are mostly allowing businesses to defer rent.  We are in an artificial bubble.

The release of lockdown is actually going to be the most dangerous time for businesses.  As they need to order more supplies to fulfil demand from their customers, when supplier relationships are already at breaking point because they are owed money, well beyond any previously agreed terms, they’re unlikely to be able to extend more credit themselves.  So how will a business owner meet those orders without being able to obtain their raw materials?

At some point quite soon, trading relationships are going to become so strained and cashflow so desperate, that normal, fairly respectful credit control processes will prove ineffective and companies will have to turn to harsher methods of debt recovery, taking legal action against their customers, by those who realise they have to appear to be shouting the loudest.

This, along with the Government reducing the support of the furlough scheme, could be the pinch point where businesses will have to make difficult decisions to make redundancies or, if they cannot reduce their other fixed costs such as leases, may need to enter into an insolvency process.

Businesses need to be sure of their daily and weekly cashflows – planning for every single payment to a supplier and to be firm with their own debtors so they know when they’ll receive cash from their customers.  But any longer term proves too vague. So they will have to arrange working capital extensions with banks and finance companies to tide them over this last period, before trade returns to pre-covid levels and businesses can start making profits again. “Cash is king” has never been more true.

But to support these businesses via their lenders, the British Business Bank need to ask UK Finance why it is not able to rely on its own internal credit assessment of its customers, to be able to advance funds more readily under CBILS.  As I understand it, the Government has removed the requirement of banks to check affordability, and as long as a business was viable pre-Covid, the bank should be supporting them.

Financial projections are so difficult to predict at the moment because there are so many variables in the assumptions a business is making. Let’s face it, in reality, any document can be provided to the bank to meet its needs to ‘tick a box’, but these are highly unlikely to be reliable.  So why are the banks even wasting their time on this futile exercise, and why aren’t they focusing on a business owner’s ability to trade through this tough period?  If a management team ran a business well before, they should be trusted to do so again, allowing them the time and confidence to engage their natural entrepreneurial skills and commercial flair, without being hamstrung by having to make decisions based more on short-term cashflow, than longer term (re)growth.

And if a bank does not have the internal ‘scoring’ systems in place to be able to judge a customer’s ability to run a business, after 5, 10 or 20 years of being their banker, then maybe the lesson the banking industry needs to learn is that they should once again train managers how to read a balance sheet, understand a business model and to be able to judge the quality of a management team – rather than focus their spend on learning how to up-sell key man insurance, or develop CRM systems which target which customers are most likely to be receptive to any add-on products. They should remember the role that banks are supposed to play in a business economy, and do it well. And if they’re not in a position to do that now because of commercial decisions they have made over the recent past whilst chasing shareholder value, they should, quite frankly, hold their hands up and apologise to the UK economy.

UK Finance’s reporting of the CBILS statistics has been embarrassing to observe with their lack of transparency and detail. Lessons have clearly not being learnt by the banking industry, despite the scandals and debacles of the last ten years.  These Government loan schemes may not have particularly favoured the Fintech and Challenger Banks’ business models, but I suspect the traditional banks have ultimately signed their own death warrant in the small business banking world and helped these ‘new kids’ to achieve a phenomenal level of customer acquisition and growth in the next 12 months.  I hope they can scale-up their product range and resources quickly, to cater for a wider range of business need, because it’s time for a new start.  Their culture and infrastructure will fit in with our modern world far better than the old names of the past, who were given yet another lifeline by the Chancellor, but chose not to take that opportunity and just took the old-worn path yet again. What a shame.

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