Shaw & Co, the specialist corporate finance advisory firm has compared and analysed the differences between emergency funding made available in the United Kingdom and United States to support SMEs in response to the Coronavirus crisis.
The findings challenge the assertion from the UK Chancellor that the Government is prepared to ‘do whatever it takes’ to support UK SMEs and the UK economy and wonders if the UK should look to the US for inspiration to improve the Coronavirus Business Interruption Loan Scheme.
With the Coronavirus having made its way from the epicentre in China through Europe and now into the US, it is natural that the US’ Coronavirus Aid, Relief and Economic Security (CARES) Act was ratified a week or so behind the UK’s CBILS measures announced on 11 March.
Unfortunately, timing of announcements is largely where the UK advantage stops, as in Shaw & Co’s critical analysis, the US package is far more effective in supporting SMEs and supporting them through the crisis. These ‘all in’ measures will better enable the US to deliver the right economic relief where it is needed, and faster. Importantly, this will allow the US to preserve far more of its business capacity and drive a far faster and broader economic recovery once the health risk of Covid-19 has passed.
The table below outlines the main differences in approach taken by the two countries, not in quantum of cash on offer, but in methodology and approach.
Jim Shaw, founder and CEO of Shaw & Co, commented: “The US has gone straight to the nub of the problem. The issue SMEs have in its raw form is lost revenue. If this is replaced by government support, the business and the rest of the economy can proceed as normal, allowing jobs to be preserved, suppliers paid and finance commitments met. The economy is propped up and capacity is retained ready for when those revenue streams return.
“The UK has followed a policy of timid intervention rather than face the problem head on. It has designed a series of interventions that merely treat the symptoms but not the root cause. This has resulted in a complex web of support that is wrapped in compromises and half measures.
“Business owners are being forced to cut deep and hard before getting access to much-needed support. They are having to ‘exercise all available options’ before any Government-backed loans are forthcoming including deferment of supplier payments, rescheduling existing loans and laying off staff. This sends ripples throughout the system and will result in material long term damage to the UK economy.
“To ensure balance, some commentators in the US are criticising the US programme for being too generous, however in two years’ time, it is highly likely that tax revenues from the resulting US economic bounce back will go a long way to silencing those critics.”
|UK Coronavirus Business Interruption Loan Scheme (CBILS)||USA Small Business Administration
Starting base – broadly similar
|Blueprint/Base Scheme||Enterprise Finance Guarantee Scheme – 75% guarantee||Small Business Administration Program – 75% guarantee|
|Purpose||Loans up to £1.2m for businesses with demonstrable lack of security.||Loans up to $5.5m for businesses with demonstrable lack of security.|
|Personal Guarantees||Regular feature due to lack of other security||Regular feature due to lack of other security|
|Administration||Through lenders approved by the British Business Bank||Through lenders approved by the Small Business Administration (SBA)|
Emergency Response – markedly different
|1. State Balance Sheet – US doing “whatever it takes”; UK minimising impact on State|
|Scheme Name||Coronavirus Business Interruption Loan Scheme (CBILS)||Small Business Administration Loans as revised by the CARES Act (SBA CARES).|
|Government Guarantee||80% up to £5m for turnover sub £45m and up to £25m for turnover £45m – £500m||100% up to $10m|
|2. Employees – US takes existing payrolls route; UK months from designing a new HMRC scheme|
|Job protection||CJRS – Separate Scheme||Within SBA CARES program|
|Protection Method||Furlough Grants of 80%||Payroll cost forgiveness within limits per employee|
|Distribution through||HMRC||SBA -> SME’s own payroll|
|Distribution Channel||New IT system to be implemented||Established IT system (normal payroll)|
|Cash flow||Retrospective claim for grant, employer pays out first recovers cash later||Employer first receives cash and makes claim for debt forgiveness later|
|Productivity||Furloughed employees can’t work, or else support removed from the employer||All employees can work whilst the employer is receiving support|
|3. Security – UK CBILS will flow only to strongest SMEs; US wide-spread fast relief|
|Business Assets||All available security must be explored first||No collateral requirement|
|Personal Guarantees||Prohibited under £250k; likely feature in most loans above £250k||Not required|
|4. Other Credit – UK SMEs bogged down before applying; US removes all obstacles to relief|
|Other Credit Availability||No need to prove lack of other credit
|No need to prove lack of other credit|
|5. Other Stakeholders – UK approach spreads contagion widely; US contains contagion|
|Suppliers||Must explore payment holidays||Paid|
|Mortgage lender||Must explore payment holidays||Paid|
|Landlords||Must explore payment holidays||Paid|
|Asset Finance||Must explore payment holidays||Paid|
|Other lenders||Must explore payment holidays||Paid|
Taking each of these measures in turn – Shaw & Co analysis is as follows:
State Balance Sheet (US wins) – The stated aspiration of doing “whatever it takes” falls short of the mark.
The US CARES Act highlights the inadequacy of the UK efforts not so much in terms of the size of the support package (we believe the UK numbers largely make sense in light of relative GDP), but in just how much the government is really risking. The US 100% guarantee and other security requirements gets the job done, whereas the UK government still seeks to keep the backstop as far as is possible on the private sector balance sheet.
By guaranteeing 100% of the SBA CARES relief loans, the lending decision is taken out of the hands of the administering banks, thereby circumventing a lengthy and uncertain credit process. At the same time, the US leverages the well-established SBA and its links to banks existing distribution network able to get essentially to any US SME in need of help.
Employees Support (US wins) – The need to support employment leads the debate in both countries. Yet the US chose to use a well-trodden distribution route, the SME’s own payrolls. By providing the employer the funds to in advance through a loan followed by retrospective forgiveness, the US again comes up trumps. Whereas the UK finds itself reversing the all-important cash flow with SMEs unable to claim employment grants until HMRC has established and implemented a brand-new Job Retention Scheme and the associated IT delivery system. We all know this IT challenge should not be underestimated.
Both economies chose the route of limited grants to protect company employees, but the UK scheme only applies to furloughed workers who are not allowed to continue working and adding economic value vs the US, where all employees (to the extent their employer keeps them) will be supported and can continue to be productive as much as is possible. This delivers support to business and keeps the economy moving as much as is possible.
Security (US wins) – By offering a 100% guarantee (and meaning it) the US programme is not hunting for security and in particular avoids the moral hazard of securing “government support” against the personal assets of business owners. Of course, this opens up a debate about the unscrupulous few who might take advantage of the generosity of the US programme due to a lack of “skin in the game”. However, in a time of national crisis one has to focus on the large majority of honest business owners who simply want to save their livelihoods and often life’s work.
Other credit (Draw) – However, only after significant lobbying! Initially, the UK scheme required business owners to explore all other forms of available credit before being eligible for CBILS.
Other stakeholders (US Wins) – Immediately upon ratification of the CARES Act, a US SME can approach any eligible SBA member bank, apply for a loan sized to the demonstrable costs of the business and distribute the money to employees, suppliers and creditors.
In contrast, a UK SME owner has to:
- Negotiate reliefs with all suppliers, creditors and other stakeholders
- In many cases for loans above £250,000, consider putting their own and their family’s assets on the line by entering into a PG
- Furlough or lay off employees to save costs taking the right steps not to fall foul of employment law
- Get all their accounts together with a ‘best-guess’ forward looking cashflow and a report on how all available reliefs have been exploited and pain inflicted on the supply chain and only, then
- Apply for a loan, which is only likely to be available from their existing bank, whose credit appetite is already curtailed by the risk that the government is insisting they take, in the face of looming tsunami of business failures and covenant breaches.
Jim Shaw concluded: “As active practitioners in the SME space, we at Shaw & Co continue to call on the UK government to revise the CBILS to make it fit for purpose for the many, not the few. By the time the UK Government decides to actually get ahead of the crisis, permanent damage will have been done. On reflection, we are sure that the cost of doing the job correctly in the first place, will be much less than the cost of lost GDP, lost tax revenue and the increased benefits bill.”