Jim Shaw: The credit process proves to be a headache for lenders
Many SMEs in the UK operate without any formal external financial support, which may not be the best use of capital.
In addition, it can make it difficult to access finance as these companies may not be able to provide the data to a third-party funder who needs to prepare forecasts, business plans and risk assessments and thus authorize a loan.
Having to engage with a lender for the very first time is extremely stressful for business owners.
Under current Coronavirus Business Interruption Loan Program (CBILS) rules, lenders are 20% exposed to potential losses. This exposure forced lenders to apply their credit and valuation standards to these loans. At the same time, they have come under enormous pressure to approve and issue loans very quickly.
We campaigned fiercely during the creation of CBILS to make these guarantees reach 100% (Switzerland, Germany offer 95%, US – 100%), which would allow lenders to lend much faster. .
The government would say that the 80/20 split is an alignment of interests: protecting the taxpayer from irresponsible loans and companies that are unable to repay them.
However, this view has forced borrowers to undergo a full credit assessment, which is difficult for many business owners and has resulted in delays in accessing the financing they urgently need.
These obstacles had a direct impact on loan applications with only 50 percent of CBILS applications approved, leaving the remaining SMEs without loan support. In my opinion, many of the SMEs that have not been able to obtain financial support will not reopen, as a direct consequence of a lack of capital. I believe the key issue that slows everything down is the credit process. With 20% risk exposure, lenders will maintain their usual credit procedures, while dealing with their own processing issues due to foreclosure and trying to meet government goals.
The British Business Bank (BBB) is of the opinion, with which I personally disagree, that lenders should offer borrowers a lower interest rate, since they have collateral.
However, the risk that lenders take on the “exposed” 20 percent of the loan has not yet been determined and is likely extremely high. In the new environment, the probability of default (PD) is just a guess, which means that in many cases loan pricing will not cover losses on a lender’s ledger.
BBB’s reasoning is that they receive state aid, which must be passed on to the beneficiary, ie SMEs. This led the BBB to demand lower interest rates on loans with CBILS support after Covid-19 than it would have had before Covid-19. In my opinion, this is too simplistic.
I will offer praise where praise is due. The government has also implemented the Bounce Back Loan Scheme (BBLS), which comes with a 100 percent guarantee, so you only go through a self-certification process to access certain funds.
The program has enabled a large part of the market to access certain financing. However, it is capped at £ 50,000. Many “less sophisticated” businesses require higher levels of funding.
The government and the BBB have made it possible for new lenders to be accredited under CBILS as quickly as possible in order to increase the volume of loans.
They have done a great job here certifying many new lenders almost every week.
If your primary bank refuses you, go to the newly approved CBILS lenders, who may have a different risk appetite and alternative funding routes.
Finally, prepare yourself – work with your advisors or a specialist firm like ours and put together an information pack on your business that will make the process more efficient and give the lender confidence in your business and your application.