After Prime Minister Boris Johnson reluctantly announced a second national lockdown in England on Halloween to suppress the second wave surge in coronavirus cases, Chancellor Rishi Sunak responded by extending the government’s flagship loan schemes. It was perhaps inevitable, but the current extension may be the last.
All three loan schemes were extended to the end of January 2021 – the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) and the Bounce Back Loan Scheme (BBLS). By mid-November, these schemes had provided £65.5bn in government-backed loans to almost 1.5 million SMEs. But ahead of next January, the government must decide how to evolve its policy to support SMEs. By our assessment, there are four options open to the government. These are: (i) further scheme(s) extension, (ii) a reversion to the Enterprise Finance Guarantee (EFG) regime, (iii) amendments to the CBILS programme, or (iv) to adopt a regional approach.
An extension to the existing schemes will likely be dependent on the scale of the unfolding second wave, the arrival and distribution of the newly announced vaccines, and public compliance to lockdown restrictions in the interim. A return to the old EFG scheme we consider unlikely. Simply put, the EFG regime was not designed to support the scale CBILS has become. We also expect the popular Bounce Back Loan Scheme to be retired. This ‘light touch’ regime served its purpose at the height of the first wave of the pandemic, but with almost no due diligence and 100% government backing, the scheme could see high loss rates. The third option of making amendments to the existing CBILS scheme is certainly not something that we would rule out. The government may prefer to tweak the CBILS framework and maintain a nationalised scheme. However, it is the fourth option – pivoting to a regional strategy – which we consider the most compelling option available to the government. The remainder of this article explains why.
Pivoting to government-backed SME support
The impact of the pandemic across the UK remains highly uneven, with more severe virus outbreaks and stringent restrictions correlated with more significant disruption to economic activity. The move back to a three-tier system to control the spread of coronavirus as the second national lockdown ends is indicative of the government’s preference for a targeted approach. It is logical to assume the government may try to mirror this strategy in its future economic policies. Indeed, there is already evidence of this. For example, before the second England-wide lockdown, Greater Manchester Mayor Andy Burnham successfully lobbied the UK government for £60m in financial support for the region.
If a regional successor to CBILS does come next, it will allow the government to prioritise parts of the country most bruised by the economic shutdown forced by the pandemic. There are two ways to achieve this. The first would be to utilise the existing regional investment funds, such as the Northern Powerhouse Investment Fund (NPIF) and the Midlands Engine Investment Fund (MEIF), to lend directly to local SMEs. These funds have been particularly successful at filling the gaps in access to finance in the areas they cover. Whilst these funds only have a limited investment amount and timescale, their infrastructure and expertise are valuable. Covid-19 could prove to be the catalyst which restructures these funds to support long-term, post-pandemic regional economic recovery. The investment mandate of these funds is to provide SMEs, which otherwise would struggle to secure finance, with debt and equity capital to support growth and build sustainable regional employers. Indeed, in the recent spending review, the Chancellor has allocated a further £100m to NPIF. The second route would be to create new regional coronavirus lending funds, perhaps similar to the NPIF/MEIF framework, but with a much more targeted geographic area, such as Greater Manchester or the Humber. This could utilise the network of socially responsible regional lenders, many of whom are already providing funding under the CBILS scheme. Whichever approach is taken, a regional loan scheme could provide targeted financial support where it is most needed.
Why the government may opt for a regional CBILS successor
We suggest four intertwined reasons. First, the likes of NPIF and MEIF are regionally based, and the fund managers have a highly relevant track record in regional SME investment. These twin advantages of location and experience better position regional investment funds to manage SME lending.
Second, a regional model could support tighter due diligence. During the first national lockdown in the spring, the government’s priority – understandably – was to ensure SMEs achieved immediate access to liquidity to keep businesses running and employees on the payroll. But next year the government could insist on stricter due diligence on SMEs to ensure only sustainable SMEs receive additional loans. A regional strategy could better evaluate local lending decisions, improving the credit profile of future coronavirus SME loans.
Third, the investment rationale of these regional funds, which are overseen by the British Business Bank (BBB), the government’s development bank, is consistent with the social priority to support sustainable SMEs and protect jobs. Lending decisions are driven by an understanding of the business, rather than a credit policy or committee. These funds aim to improve the regional economy, rather than deliver a return on equity for shareholders. These first principles mean lending is often higher risk (e.g. the loans are often unsecured), but not at the expense of due diligence. Also, different measures of success are applied. For example, sustainability as a regional employer can be prioritised over revenue growth targets. Fourth, a regional framework could integrate the government’s also expiring Future Fund, which targets pre-revenue or pre-profit start-ups. The NPIF and MEIF framework already includes equity lending and convertible loans to support potential high-growth SMEs that otherwise struggle to secure capital.
Overall, how the country manages the second wave of the pandemic will inform the nature of the government’s economic policies in support of SMEs. Whatever happens, access to finance for SMEs will remain challenging next year and beyond. If you would like to talk about your financing options, do get in touch with one of our team today and we will do our best to help you navigate the uncertainty.