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Government patches up small business loan scheme

Changes to the Coronavirus Business Interruption Loan Scheme, under which the government guarantees 80% of loans made by banks and lenders, are having a positive effect.

The government’s flagship loans scheme for small and medium-sized businesses, the Coronavirus Business Interruption Loan Scheme (CBILS), has not had an auspicious beginning. Data from UK Finance, the group that represents the banking sector, shows that lenders have so far received a relatively meagre 28,460 loan applications – and approved just 6,020 advances.

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Interest does appear to have picked up since the first few days, when only a handful of loans were agreed. Changes to the scheme, under which the government guarantees 80% of loans made by banks and lenders, seem to have had a positive effect. 

In particular, businesses no longer have to be considered for conventional banking products before being granted access to the CBILS, and directors of smaller businesses can’t usually be asked to personally guarantee loans.

Should it go further?

Nevertheless, critics of the scheme insist further reforms are necessary if take-up rates are to rise substantially. Some have suggested that the state guarantee 100% of each advance in order to encourage lenders to be less cautious; similar schemes in Europe appear to be attracting more support. There have also been calls for the banks to relax their own lending criteria, with some firms complaining about affordability constraints.

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Ministers are understood to be nervous about offering 100% guarantees, insisting that banks should have a commercial interest in the loans they make. But there is a growing consensus that the smallest borrowers – perhaps those seeking less than £25,000 for finance – may need further support if the banks are to be encouraged to lend to them. Bank of England governor Andrew Bailey is among those suggesting this may be required.

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Elsewhere, the Treasury has shown itself willing to be flexible in order to ensure Covid-19 rescue packages reach as broad an audience as possible. In particular, its furloughing scheme, which opened for applications on Monday and funds the cost of 80% of wages for employers laying people off temporarily, originally had a cut-off date of 28 February. However, that was subsequently changed to 19 March following complaints that workers who moved jobs during the first half of the month would miss out.

For employers, the change means that any employee for whom they sent payroll information to HM Revenue & Customs by 19 March under the real-time information system is now eligible for furloughing. The scheme has also been extended until the end of June, enabling firms to keep staff on their payrolls, with the government picking up the cost of employing them, until then. Staff may not work for the business while furloughed, but can take up work elsewhere.

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Such support is crucial. The Corporate Finance Network, which represents 12,000 accountants working with small and medium-sized enterprises, has estimated that 800,000 such businesses do not have enough cash to survive for longer than a month. This underlines the concern about the lack of applications for the CBILS.

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The government has addressed employers’ anxiety about annual leave rules by relaxing the regulation that prevents staff carrying statutory annual leave over into a new holiday year. The rules are designed to ensure workers take paid holiday but they have been causing problems with so many firms effectively closed. Workers may now carry over annual leave not taken owing to the pandemic for up to two holiday years.

A new scheme for startups

The government this week unveiled financial assistance for startups that have effectively been excluded from other efforts to support small and medium-sized enterprises through the Covid-19 crisis. Under the Future Fund, ministers have pledged a total of up to £250m of funding for such companies but, to qualify, they will have to raise an equal amount of finance from private investors. They must also have raised at least £250,000 in funding from private sector investors over the past five years.

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The Future Fund will offer finance of £125,000 to £5m, with funding made in the form of convertible loans. In most cases, these loans will convert into equity at a 20% discount to the issue price when the business next raises funding from investors. In addition, the loans will carry an interest rate of 8% a year.

Startup groups have given the Future Fund a cautious welcome, having campaigned in recent weeks for direct support. Many such businesses have found themselves barred from the Coronavirus Business Interruption Loan Scheme (CBILS) for small companies because the terms of that initiative require almost all borrowers to be profitable.

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The Future Fund could therefore unlock valuable capital for loss-making startups, enabling them to survive the current crisis before they return to more conventional financing options as markets normalise.

However, there is some concern that private investors will be unwilling to put up the matched capital that the government is insisting on as part of its eligibility criteria. While this restriction is designed to ensure that it is the most viable startups which secure finance, the Enterprise Investment Scheme Association warned that the Future Fund appeared to offer better terms to the government than to private investors, many of which might choose not to support it.

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The government promised to publish full details of the scheme in the next few weeks, with the scheme due to be launched in May.

Insurers duck Covid-19 claims

The Financial Conduct Authority (FCA) has promised to take a tough line on insurers that fail to pay out on valid business interruption policies during the Covid-19 crisis. Insurers that don’t pay up quickly will be ordered to explain themselves.

The intervention follows mounting concern that even those insurers whose policies appear explicitly to include cover for businesses forced to close because of public health issues are turning away claims. Hiscox is facing legal action after claiming its policies were not meant to cover pandemic risks, despite covering losses incurred by firms after “an occurrence of any human infectious or human contagious disease”.

In other cases, insurers have argued that business interruption insurance is only valid for Covid-19-related losses where policies are written in the most specific language possible. The FCA says businesses with turnover of less than £6.5m and fewer than 50 employees can take disputes with insurers to the Financial Ombudsman Service.

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