By David Grosse, managing director of Number Eight
These are strange, unique and once-in-a-lifetime moments in our lives. Never before have any of us experienced the feeling of being contained at home and, for some of us, there are no guarantees for the future once the COVID-19 storm has finally passed. Sadly, I fear that the current storm is merely a precursor for an almighty tsunami that is about to follow.
Over past few weeks I have continued to speak to businesses of all shapes and sizes and, despite the barrage of positivity that has been pumped out from the daily governmental soapboxes, it would appear that all is not as positive as it should be.
The first big mistake was to entrust the British banking system to manage the Coronavirus Business Interruption Loan scheme. Although I have been informed that the banks have been supportive and, allegedly, about 33% of businesses that have applied have benefited from the CBIL, the vast majority have not! Also, we never hear or understand what the word “supportive” actual means in this context. For example, those businesses that have applied for financial support: how many have actually been given the amount that was applied for?
“Further innovation will be required to support businesses that need cash to stand any chance of staying afloat”
Then followed the announcement that the British Business Bank was extending the CBIL accreditation to a number of alternative lenders including Funding Circle, Newable and ThinCats. These three choice lenders have differing lending appetites and underwriting criteria, as has the high street bank. But no criteria will bend for any business that is currently unable to trade or is facing a period of unprecedented uncertainty. Despite the government’s 80% guarantee, or even if they extend this to 100%, I still can’t see how any underwriter will sanction any debt finance without some confidence that the amount can be repaid.
Sadly, this current situation is only going to get worse once life returns to normal. While there are some trades and marketplaces that will snap immediately back into action, many others will not. The insolvency practitioners are braced for an overwhelming flood of business failures as the fallout from the coronavirus pandemic starts to materialise and, in my opinion, they should be recruiting hard because the tsunami is heading their way!
Lenders, too, must be thinking about how they will be able to move forward in the future. The majority have offered the three-month repayment holidays, but how many of those are expecting the holiday to either be extended or enter a default or bad debt position? Then you have another problem: who will be comfortable about lending new money when the current book is in distress?
Many brokers and intermediaries must be concerned for their futures and their role in the marketplace. Before lockdown, lenders were showing signs of change in their appetite to lend. The criteria belt was tightening, and good businesses were being declined. For example, our business used to boast an acceptance success rate of more than 95% in 2018. This figure dropped to 78% the following year.
The damage to business will be significant. According to some reports, more than one in four UK companies (27.2% of the total business population) are being heavily impacted. The consequences of what is about to follow the COVID-19 storm are sure to be far-reaching, especially considering how interconnected the UK economy and supply chain is. Therefore, if businesses are struggling to find funding now, it is unlikely they will have much success in the short term unless the government introduces further measures to stimulate the economy post-lockdown. This includes employment and the property market, both of which are vital to ensuring that life can stabilise quickly and with limited lasting damage to all concerned.
Lenders will need to think hard about their future. For example, further innovation will be required to support businesses that need cash to stand any chance of staying afloat. Maybe introduce a 12-month interest-only product that will be compatible with current affordability benchmarks. Thereafter, the repayment of capital can be introduced over a further five-year term. Over-analysing or increasing rates to counterbalance the risk is not the answer. Decisions based on business performance and financials prior to the COVID-19 outbreak should be applied.
Without stimulus or incentive, I am currently at a loss to see any real light at the end of the COVID-19 tunnel. We all hope that life will return to normal quickly, and that these unprecedented events will soon become a mere conversational topic over a pint or two. I only hope that the pubs will be able to reopen, and that those who think all UK businesses will be fit for purpose once again will look more closely at the big wave that is looming on the horizon.
David Grosse, Managing Director,