Pandemic loan problems will propel alt finance among SMEs

Steve Richardson is director at Reparo Finance


Issues with repayment extensions on COVID-19 business loans and fraud will see more SMEs turning from banks to alternative lenders for finance.

The Chancellor has recently performed something of a U-turn on the repayment of COVID-19 loans. In the past few days, although details are to be finalised, it has been announced that some firms will get longer to repay Bounce Back Loans. This follows recent reports suggesting that tens of thousands of businesses, many of which are SMEs, faced collapse, as banks fail to grant repayment extensions on COVID-19 loans.

Banks were refusing repayment extensions, as the Treasury would no longer commit to underwriting loans using taxpayers’ money, despite a pledge by the Chancellor last September to extend loan-payment periods on Coronavirus Business Interruption Loans (CBILS) and for the Bounce Back Loan Scheme (BBLS).

It’s now unclear if businesses will be granted an extension on CBILS repayments.

This is against a backdrop of growing concerns about losses associated with COVID-19 business loans. The National Audit Office (NAO) has reported that an estimated £31bn worth of government-backed coronavirus loans will have to be written off, due to a large proportion of loans being fraudulently acquired.

SMEs risk paying a high price for this situation. After the financial crash in 2008 and the subsequent recession, we saw a trend of banks restricting lending to small and medium-sized businesses. SMEs were either considered too high risk or low value by traditional lenders. These businesses are now facing a similar scenario.

Banks will now make SME borrowing even more rigid as they become increasingly risk-averse towards smaller companies. During a time of uncertainty, it is much easier for banks to strike a line through SME lending, rather than build a risk-weighted lending model.

This will lead to many banks ignoring the funding requirements of small and medium sized companies by dressing up rejection in the niceties of the Bank Referral Scheme. This redirects borrowers to other lenders with no real appreciation of why the SME applied in the first place.

Perhaps banks will entertain some low level of SME lending as a box-ticking, reputation management exercise. This is likely to be a slow and painful application process for SMEs, which is more concerned with filling out the right forms rather than the lender understanding the people and company seeking finance.

Alongside the banks’ reluctance to lend, there are likely to be logistical challenges. Banks are stretched at the moment, partly from processing government loan schemes and due to other challenges, the pandemic has presented. Many banks may not have the resources to dedicate to the tricky business of SME lending.

Lending to small and medium sized companies is complicated. It’s harder to value risk and make lending decisions. Many of the businesses have limited financial information, atypical cash flow or operate in verticals that lenders don’t understand.

When SMEs start to access alternative lenders, they will undoubtedly find lenders willing to have a conversation to understand their circumstances. This means they stand a good chance of finding a lender that will have a product that fits and see more SMEs turning to alternative finance.

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