Will the Covid-19 loan scheme fail the most vulnerable small firms?

Written by Oliver Prill, CEO for Tide – a UK-based fintech firm that provides mobile-first financial services for SMEs.

With the impact of the Coronavirus, and resulting policies of social distancing, impacting micro, small and medium sized – businesses in an unprecedented way, we need to be taking widespread action as soon as possible.

The measures announced by the Chancellor in the Budget and in the press conference on 17 March are generous and will be crucial to the survival of our small business sector, however there are serious problems in the speed of delivery and the mechanisms through which they are being delivered.

I have written to the government today to outline that the Coronavirus Business Interruption Loan Scheme (CBILS), accessible via the British Business Bank, has a worrying lack of reach. The British Business Bank’s decision to work only with the traditional banks and lenders, already on the Enterprise Finance Guarantee scheme, reduces the reach to an estimated 80%, meaning 20% of micro, small and medium sized businesses will have no access to the scheme.

Of that 80%, a further 80% will be denied access to credit due to restrictive lending practices, compared to the more advanced lending technology and differences in risk appetite, that the fintech sector offers. As a result, one third of the most vulnerable small businesses could start to fail at scale within 4-8 weeks, as they do not have the liquidity reserves to continue much longer.

In addition, the British Business Bank will only assume 80% of the risk on these loans, with the other 20% sitting with the lender. While asking lenders to assume 20% risk is usually appropriate, at times of crisis given the serious deterioration of the credit worthiness of small businesses at this time, this could lead to too few businesses being eligible. Furthermore liquidity available to lenders will be reduced in a crisis and therefore the guarantee amount needs to come with funding.

The fintech sector is large and growing rapidly in terms of customer volume. By opening up the CBILS to new lenders from the fintech sector the government would be able to support many more small businesses and save companies crucial to the UK economy from failing. Immediate emergency access should be given to all SME lenders as a ‘whatever it takes’ measure. In a second step, the scheme needs to be redesigned by people who really understand the current urgent situation and are willing to act boldly.