Jim Shaw: Credit process proves a headache to the lenders

Many SMEs in the UK operate without any formal external financial support which arguably may not be the best use of capital.

In addition, it can make access to finance difficult as these companies may not be able to provide the data to a third party funder who needs to establish forecasts, business plans and risk assessments and thus authorise a loan.

Having to engage with a lender for the very first time is hugely stressful for business owners.

Under the current Coronavirus Business Interruption Loan Scheme (CBILS) rules, lenders have a 20 per cent exposure to potential losses. This exposure has forced lenders to apply their credit and assessment standards to these loans. At the same time, they were put under huge pressure to approve and issue loans very quickly.

We campaigned hard at the establishment of the CBILS for those guarantees to go up to 100 per cent (Switzerland, Germany offer 95 per cent, USA – 100 per cent) which would allow lenders to lend much more quickly.

The Government would say that the 80/20 split is an alignment of interest: protecting the taxpayer from loans being made irresponsibly and to businesses which would be unable to repay them.

However, this view has resulted in borrowers having to go through a full credit assessment which for many business owners is difficult and has meant delays in accessing urgently-needed funding.

These hurdles have had a direct impact on loan applications with only 50 per cent of CBILS applications being approved leaving the remaining SMEs without lending support. In my opinion, many of the SMEs that could not secure lending support will fail to reopen, as a direct result of a lack of capital. I believe the key issue that slows everything down is the credit process. With a 20 per cent risk exposure, lenders will maintain their usual credit procedures, whilst dealing with their own processing issues due to lockdown and trying to meet Government targets.

The British Business Bank (BBB) has the view, which I personally don’t agree with, that lenders should provide borrowers with a lower interest rate, since they have a guarantee.

However, the risk lenders are taking on the “exposed” 20 per cent of the loan is yet to be determined and is likely extremely high. In the new environment the probability of default (PD) is simply a guess meaning that loan pricing in many instances won’t cover the losses on a lender’s book.

The BBB’s reasoning is that they are getting state aid, which needs to be passed on to the recipient, i.e. the SMEs. This has resulted in the BBB requiring lower interest rates on loans with CBILS support post Covid-19 than they would have had before Covid-19. In my view this is overly simplistic.

I will offer praise where praise is due. The Government has also set up the Bounce Back Loan Scheme (BBLS), which comes with 100 per cent guarantee, and thus one only goes through a self- certification process to access some funds.

The scheme has allowed a significant portion of the market to access some funding. However, it is capped at £50,000. Many “less sophisticated” businesses require larger levels of funding.

The Government and the BBB have allowed new lenders to be accredited under CBILS as quickly as possible to increase the volume of loans.

They have done a great job here accrediting numerous new lenders almost weekly.

If your high street bank turns you down, approach newly approved CBILS lenders, who may have a different risk appetite and alternative routes to funding.

Finally, get prepared – work with your advisers or a specialist company like us and prepare an information pack about your business which will make the process more efficient and give the lender confidence in your business and application.