UK Coronavirus business interruption loan scheme in “accredited provider” gridlock to disperse funds

LONDON-- By the weekend, Chancellor Rishi Sunak is preparing to announce an overhaul of the Government’s emergency aid scheme for small businesses (SMEs) amid warnings about a deluge of insolvencies as companies struggle to gain access to funds from a banking system that is drowning under the covid-19 crisis.

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The Corporate Finance Network recently conducted research with 13,000 SME’s. “Its conclusions are stark,” comments Tim Stocks, Chief Executive of specialist merchant bank, James Stocks & Co.  

An estimated 18% could become insolvent within the next four weeks due to their inability to access HM Government support under the Coronavirus Business Interruption Loan Scheme (CBILS).

The announcement of CBILS was welcomed by business, in theory at least, according to the merchant bank, with every company expecting to qualify, provided they fulfil one criteria – turnover of £45m or less.

“So far so good,” says Stocks, “from the outset however the seeds of frustration were sown.”

Stocks explains that as a mechanism, the HM Government guarantee has been “crudely bolted” on to an existing loan guarantee scheme (Enterprise Finance Guarantee) operated by the British Business Bank. This scheme involves “guaranteed” loans being offered through a list of “accredited providers”. 

According to Stocks, overlaying CBILS onto this platform immediately creates two problems:

The first problem is if the business does not have an existing loan with the accredited provider then they are in effect, blocked from the scheme. The accredited providers’ first commercial priority will be to support customers with existing borrowings. Their next priority will be existing customers who use other services, says Stocks.

The providers’ last priority is new customers. Unsurprisingly, signing up as a new customer of an accredited provider is proving very difficult in the current environment. The second problem is that the existing scheme has a list of businesses that are excluded. Whether the Government will relax this list of exclusions is not at all clear.

Assuming then, that the business does clear the initial hurdles, it must submit a loan application that will be run through the normal credit processes and due diligence before being sanctioned.

“If the loan application would be accepted under normal lending criteria then the accredited provider does not have access to CBILS. In determining whether a loan should be approved an accredited provider can ask for additional security. Personal guarantees are generally required when a loan exceeds £250,000, and where there isn’t adequate security.”

The merchant bank chief executive says it “seems the accredited providers were caught on the hop with the Chancellor’s announcement of CBILS”.

The lockdown has also caused providers a lack of central resources to cope with the wave of loan applications.

“Clearing banks have reported thousands of applications within the first few days – a volume they cannot possibly process in a mere couple of weeks,” says Stocks.

In a Twitter response to a question made via Twitter: As business owners can we apply to more than one provider of CBILS without it adversely affecting one or the other?

The British Business Bank replied: “We recommend you approach your existing provider first – ideally via the lender’s website. You can also approach other lenders if your lender is unable to provide the finance you need.”

Stocks’ suggestions to expand the provider pool:

  • A ready solution is to expand the “accredited provider” distribution channel. Applications might be made directly to the British Business Bank rather than through the accredited provider network. Evaluating these applications could be outsourced to the many corporate finance houses that have the capacity to assist. In addition, this resource could handle KYC/AML on-boarding.
  • Rather than relying solely on a sub-set of the banking system to fund SMEs, a network of hedge funds and credit funds prepared to fund loans against the Government guarantee should be assembled. 
  • Part of the funding package might include either existing shareholders or other funders/sources funding the 20% requirement not covered by the Government guarantee.
  • For this to work, however, the Government needs to seriously consider dropping the requirement for the guarantee to be limited to 80% of the loan size.

“The accredited providers don’t have the capacity, any time soon, to do the due diligence required to justify taking the 20% exposure for all parties who urgently require support,” suggests Stocks.

“To have any chance of it doing so the Government needs to extend the channels well beyond the existing “accredited provider” regime. It must consider independent corporate finance advisers, with funds being disbursed by hedge funds and credit funds that already have the benefit of the HM Government guarantee,” he says.