Prime Minister’s Office
10 Downing Street
2nd April 2020
Dear Prime Minister, Chancellor of the Exchequer, and Chair of the Select Committee for Business, Energy and Industrial Strategy,
We were greatly encouraged by the introduction of The Coronavirus Business Interruption Loan Scheme (CBILS), which currently provides accredited lenders with up to 80% credit loss cover on an individual loan and up to 75% (net 60%) on a portfolio basis.
For the non-bank CBILS accredited lenders (we are proud to be amongst the largest of these), the scheme was initially very welcome, but in practice, it is clearly failing to provide much needed loan capital to the UK’s SMEs.
Many non-bank lenders source their capital from larger banks, investment funds or private individuals, and as such there is very limited capacity for these lenders to increase their lending volumes due to the caps imposed by their funders.
This lack of available liquidity for non-bank lenders is exacerbated by, firstly, a deterioration in lenders’ existing books as existing borrowers are granted payment holidays and struggle to make payments, thus limiting many lenders’
ability to access existing capital through re-investing the repayments of borrowers. Secondly, with the market dislocation caused by the pandemic, many banks and credit funds no longer have the appetite to increase their exposure and capital deployment to SME lenders.
As a consequence, many SMEs are reporting that SME lenders are unable to provide them with the loans they need and deserve, giving rise to understandable anger and frustration amongst SMEs.
Our proposed solution, modelled on the widely-praised US initiative, is two-fold:
1. The credit loss cover on an individual loan should be increased to 100%, and the portfolio cap should also rise to 100%. This would remove the lenders‘ requirement to underwrite and assess the risk to themselves, and it would therefore exponentially increase the rate at which money could be distributed to deserving businesses. The only checks lenders would need to make would be for identity and to ensure the borrower understands the product, and then for proof against two financial criteria which would determine the size of the available loan: (a) a percentage (to be determined) of annual payroll costs or (b) a percentage (to be determined) of prior year turnover. Once identity is checked by the lender, the payroll financial test can be checked against HMRC records provided by the borrower and the turnover financial test can be self-certified by the SME. Given the right information, this could be done in less than an hour. Money could be flowing in 24 hours.
2. The second, and equally important requirement is for the British Business Bank, or the Bank of England, HMT or via UKGI to create a liquidity facility from which accredited non-bank lenders could borrow to support the growth of their CBILS loan books. This would need extremely rapid implementation to allow CBILS to achieve its intended effect.
The effect of this proposal would be to save many businesses, which currently face insolvency as a result only of the temporary freezing of economic activity. It would also release essential liquidity into many businesses rather than just a select few.
We stand ready to support you in this.
Chief Executive Officer