Now is the time for the bank referral scheme to show its worth
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We get it. Banks can’t lend to every business. But don’t let a decline be a death sentence.
There is much indignation from SMEs (reflected in the press), as well as amongst professional and trade bodies, about the way that the main banks are failing to deliver the Chancellor’s CBILS funding package for small businesses. I suspect that this is less to do with a simple unwillingness to help and more to do with circumstances. In the first instance, the scheme was announced as a lifeline to businesses hit by the pandemic (almost all of them), however the banks were subsequently told that this should be a loan of last resort, without much guidance on what that really meant.
In practical terms, this has meant that the hoops to jump are just too great for many struggling companies who often don't have a finance function that can prepare detailed forecasts to establish viability. Even if they did, the time taken to asses each application is likely to be a death sentence for many. If we wish to avoid a mass culling of SMEs like never before they need cash now, not in six- or eight-weeks’ time.
We know the Chancellor and his team recognise this and expect some movement in policy in the next day or so.
Whilst we can all accept that HMT and the BBB’s hearts are in the right place, I think it’s fair to say that they have fallen in to the same elephant trap that stymied cash support for small business at the height of the financial crisis. Essentially, for most SMEs the main banks are just not the right delivery partner for this type of emergency intervention. They are culturally cautious (they are bankers, after all) and have little to gain and much to lose by acting quickly, and thus, once again, the government tennis ball of money is stuck at one end of the banks hosepipe, with little sign of progress, at least not at the pace and volume that is needed.
HMT need to look beyond the banks, as they have done before. The Bank Referral Scheme was set up to connect SME borrowers with a wide array of non-bank funders through technology driven aggregator platforms. These platforms have all seen a surge in registrations since the crisis hit, and are the perfect way to get relatively small sums of money to desperate SMEs very fast indeed, with many platform lenders having a turnaround time of days, or even hours, not weeks or months as is the case with the main banking model.
There is a supply side problem here, however, since many non-bank lenders will not benefit from the CBILS guarantees they simply have no alternative than to be extremely cautious, thus exacerbating an already grave problem.
A sensible and relatively inexpensive solution to all this would be for HMT to extend the CBILS type support to non-bank lenders who are listed on the three HM Treasury designated platforms up to a limit of, say, £25,000. They should then order the banks to refer all applicants under the scheme who are seeking less than that amount to the designated platforms who will, in turn, match them with an appropriate funder and have the lifeline cash to them in a few days, not, I repeat, weeks or months. Funds would be released on commercial terms with responsibility for repayment resting with the borrower as normal, but with the CBILS scheme limited value backing, and the ability of designated platforms to turn things around really fast this should be a lifeline for the millions of really quite small businesses for whom £25,000 would be a lifesaver.
The non-bank funding sector already accounts for around seven billion of SME funding. This proposal could put a zero on the end of that and could well be the way that we emerge from this with a viable small business sector.
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