How can UK lenders utilise the £330bn of government Covid-19 lending support?
We are in unchartered waters and given the day-to-day dynamism of the global economy and political responses, it’s an increasingly worrying time for the ~5.8 million small and medium sized businesses in the United Kingdom.
To ensure UK SMEs can continue to support their ~16.6 million employees, the UK government has announced measure to support lending to this vital part of the economy – responsible for half of all turnover from the private sector.[1]
Funding Situation
Given the expected economic impact of the outbreak of coronavirus in the UK there have been several funding options that have been put in place that banks could take advantage of to help support SMEs.
The most significant one for the UK is probably the TFSME[2] (Term Funding Scheme with additional incentives for SMEs) by the Bank of England: this is making available both to banks and non-bank lenders money that can be loaned to small businesses and households over a term of up to four years at an interest rate only a little greater than the Bank of England base rate.
At the same time as the publication of TFSME there was an announcement – 11 March 2020 – of the reduction in the Bank of England base rate from 75 basis points to 25 basis points.
Over and above TFSME, which is specific to lenders who can offer collateral, the British Business Bank is providing support to lenders in the form of loan guarantees via a number of banks and other lenders in the space of:
- Term Loans
- Asset Finance
- Invoice Finance
- Revolving Credit (Overdrafts)
The British Business Bank supported lending is named “Coronavirus Business Interruption Loan Scheme” (CBILS)[3].
Chancellor announces latest measures
As well as CBILS and TSFME, yesterday the UK Chancellor Rishi Sunak announced the following measures all designed to further support UK businesses:
- Businesses in the retail, hospitality and leisure sectors with rateable value <£51,000 will not have to pay business rates this year
- The same organisations that are covered by point 1. can access a cash grant of up to £25,000 per business
- There is a business rates holiday for 12 months for all businesses in the retail, hospitality and leisure sectors – irrespective of rateable value of their premise
- Over and above the points made in 1.-3. for 700,000 businesses a cash grant will be made available of £10,000
Product configurations
There are several changes to SME lending that could prove to be useful during the outbreak.
1. Sector demand predictions
For originations of business loans, with enough data available, it may be the case that it’s possible to predict demand for specific sectors. The obvious example of this would be a company currently selling hand sanitiser and cleaning products or pharmacies. Equally, if making direct marketing or telemarketing approaches, it may prove worthwhile to avoid for the moment those businesses whose revenue streams are likely to fall dramatically such as licensed premises.
2. Crisis Friendly Pricing
Another volume generative initiative might be to offer a “low-start” lending facility meaning that either:
- No interest charged for first 1, 2 or 3 months
- No payments at all for first 1, 2 or 3 months
- These mechanisms would help reduce the repayment burden during possibly the most critical time – as it starts to peak – of the coronavirus crisis.
3. Proactive bureau data analysis
Banks could, on a monthly basis, refresh bureau data – from the likes of Equifax and Experian – and if there’s a behavioural change (e.g. a dramatic increase in utilisation), contact the borrower proactively to offer to either:
- Payment holiday / grace period of up to 90 days (thus meeting the FCA CONC requirements for sole traders who have borrowed < £25,000)
- Rescheduling loan to take account of changes in economy – e.g. offering to add up to 6 months
This allows for both additional interest revenue to be earned but also – considering TCF (treating customers fairly) obligations – for reporting of loans to the credit bureau to be reflective of reality whilst removing the likelihood of a black mark against a customer’s credit profile.
[1] https://www.fsb.org.uk/uk-small-business-statistics.html
[2] https://www.bankofengland.co.uk/markets/market-notices/2020/term-funding-scheme-market-notice-mar-2020
[3] https://www.british-business-bank.co.uk/ourpartners/supporting-business-loans-enterprise-finance-guarantee/
