Part of the problem is cultural: big banks in the UK don’t like lending to small businesses, especially not at 1.5%.
Thanks to its Brexit planning, the UK should have been better positioned to help its small businesses through the coronavirus crisis than most of its European peers. In early 2019, the UK treasury, together with the business department and the state-owned British Business Bank, laid the groundwork for a loan guarantee system for small businesses in the event of a chaotic Brexit. This meant that when the Covid-19 lockdown began, all the government needed to do was dust off those plans and put them into action. It should have been smooth sailing. Instead, it’s been an unmitigated disaster.
On March 19, the day the economy went into lockdown, the government unveiled £330 billion of emergency measures to help shuttered businesses weather the storm. Those measures included the Coronavirus Business Interruption Loan Scheme (CBILS), which the Chancellor of Exchequer Rishi Sunak said would be made available to “any good business in financial difficulty who needs access to cash to pay their rent, the salaries of their employees, pay suppliers, or purchase stock”. Yet almost four weeks later, just 4,000 of the 300,000 companies that have applied for the funds have actually received them.
“Something has gone wrong,” warned former Bank of England governor Mervyn King on Sunday. Due to a combination of voluminous government red tape, complex eligibility criteria, massive roadblocks erected by the participating banks and the temporary closure of a large number of bank branches, the amount of money so far lent out by UK lenders to small or mid-sized businesses is just £800 million pounds. That’s less than 0.25% of the total £330 billion pledged in loans for businesses, small and large.
In Switzerland, with a population roughly one eighth the size as the UK’s, 76,000 small businesses had received emergency loans worth more than CHF15 billion ($15 billion) as of April 6. Since then, the Swiss government has doubled the facility from CHF20 billion ($20.8 billion) to CHF40 billion ($41.6 billion). The much-lauded loan scheme’s success appears to rest on two basic pillars:
One, simplicity and speed. To qualify for a loan of up half a million francs, small business owners merely have to fill in a one-page form containing six basic questions, which they must answer honestly. Once the form is sent to the bank, the application is approved or rejected within no more than 24 hours. If approved, the loan is interest free, does not include penalties and is repayable in five years.
Two, zero risks for banks. All loans of up to CHF500,000 are 100% guaranteed by the state, meaning the banks have nothing to lose and are therefore less worried about the risk of providing financial lifelines to businesses whose future is far from certain, even with the loans.
In the UK, by contrast, 80% of each loan is guaranteed by the state, which means banks must assume 20% of the risk of non-payment. Even before this crisis began, large UK banks were already reticent about lending to small businesses. Worse still, many of the small firms they have lent to ended up being lumbered with dodgy financial products such as payment protection insurance (PPI) or interest rate swaps, which had an annoying tendency to harm or destroy the business’ financial health while making the bank bucket loads of money.
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