In an exclusive interview with B&C, Douglas Grant, managing director at specialist lender Conister Bank & chief executive at the AIM-listed Manx Financial Group (pictured above), discusses how lenders can work with the government in providing financial protection to SMEs in these troubled times, and what can be learned from loan schemes introduced during the pandemic.
The Bounce Back Loan scheme (BBLS) was designed to assist SMEs in borrowing between £2,000 and up to 25% of their turnover. The maximum loan available was £50,000 with no fees or interest to pay for the first 12 months and, after this point, the interest rate would be set at 2.5% a year.
Conister Bank was accredited for both the Coronavirus Business Interruption Loan Scheme (CBILS) and the BBLS in 2020, in addition to the Recovery Loan Scheme (RLS). It worked to support the SME sector, lending record amounts in 2021, having agreed funding deals totalling £212.6m, while its loan book grew to £234.4m.
Since the BBLS closed to new applications in March 2021, SMEs have started to struggle once more as surging inflation, fuel price increases and cost of living challenges hit, affecting sectors from catering to aviation. In July this year, the government extended its £4.5bn RLS for a further two years, although this amount is dwarfed by the £47bn handed out through the BBLS which offered lenders a 100% guarantee.
“Certain sectors of the economy which have just recovered from Covid have been hit by the war in Ukraine and cost of living crisis,” said Douglas. “These sectors are going to take longer than others, and therefore the government should be more focused on where they're trying to allocate to help avoid the scattergun effect, which was really the strategy going back to the BBLS.”
While the RLS only guaranteed 70% of the finance to the lender, Douglas recalled this system as a better option going forward compared to the BBLS, as the underwriting being passed back to the lender actually allowed for more speed and the comfort of being in a “more normal position” when providing loans.
With all this in mind, Douglas’s support for specialist lenders providing finance under a government-backed loan scheme is currently a provisional one, with proper due diligence needed on those applying for the loans, and the cash targeted towards sectors that are in dire need of assistance.
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Zombies
Areas like these include so called ‘zombie’ SMEs, which are defined by Douglas as companies which qualified for government assistance during Covid but are now laden with debt, while streams of income haven’t reached pre-Covid levels.
“Right now, these SMEs are just treading water,” he said. “At some point, these zombie SMEs are going to need to be put into administration. We need to think about how this can be avoided, and ask tough questions such as should we have been less supportive of them initially, and accepted that the companies in a weaker position would fail?”
Even if these companies are given the initial cash injection to survive an immediate crisis, they are less likely to come through a recession as they will have less reserves, observes Douglas. He also points out that, unless a way forward can be seen for a company to receive a loan and still enter into a stable future, there will be waves of administrations and liquidations which can't be good for the health of the wider economy going forward.
Fraud
The BBLS was designed to be easily accessible and quick to hand out cash to struggling SMEs, yet unfortunately these moves by the government to shore up a rocky economy also led to an enormous amount of fraud. The Public Accounts Committee has estimated that £6bn was incorrectly distributed using Covid support schemes — whether through fraud or mistakes — of which £4bn could be written off.
“We live in a world where cybersecurity fraud is an ever present danger, and you're constantly upgrading your defences. I think when the government put these schemes out, hackers and fraudster saw an opportunity in it.
“It was inevitable that you were going to get fraud, especially in the early days when the banks and government made only so many checks, and once the company passed those checks they were given the loan”, says Douglas.
He believes that, in future, both banks and applicants will likely be watched more closely when it comes to loans being shored up by government money.
Brokers
Brokers are of course essential to the smooth running of a specialist lender, and also played a critical role in the relationship between government and lender during previous loan schemes.
Conister’s credit broker, Blue Star Business Solutions, was acquired in 2018 in a deal worth £4m as part of its strategy to bolster its position within the UK brokerage universe.
“We were lucky to acquire a really good broker and, because they it knows the customer and the products, its level of arrears is incredibly low. It maintains in-depth relationships with its customers, and these sorts of dynamic brokers can really add value to a lender.”
With this relationship in mind, Douglas sees a harmonious relationship between broker, government, and lender as key to future government-backed loan schemes that can build on progress achieved during Covid and rectify any previous mistakes made.
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