The scale and failure of the much lauded Government-backed bank loans to reach business seems to be misunderstood both by the Government and the media and will have terrifying consequences for the economy.
As an owner of a relatively small restaurant business that has applied for a Government-guaranteed bank loan, I would like to make the following point. The percentage the government guarantees of the virus loans is not the reason for the dismal failure of the initiative to aid the recovery of businesses currently in intensive care who, through no fault of their own, have been caught in the crossfire of the viral war. The issue is the lending criteria for the loan given by the Government to the banks.
The media focus is currently on the government to reduce the bank's liability and offer 100% government guaranteed loans. Whilst not unwelcome, this does not make much difference if it is the businesses that are to repay 100% of the loan, which the vast majority will do. The real issue is that businesses are unable to obtain the loan in the first place due to the lending criteria, which is summarized as requiring normal commercial terms. It’s a bit of a Catch 22: few business prior to the crisis were running balance sheets to support loans they did not want or need and those that did probably would not need them. I imagine that if banks in retrospect are seen to have been negligent on the lending criteria set out by the Government, that in the situation of a default they would be liable for 100% of the loan they administered. Little surprise then that so few loans have been approved despite no shortage of funds.
On Monday 13th April it was reported in various newspapers that 4200 or 1.4% of the 300,000 virus loan applications for a total of £800m have been accepted so far. This sounds appallingly low and an average of £19k per business is not an impressive figure. Though the situation is actually dramatically worse than even these figures would suggest and demands more investigation. Of the £330 billion put aside by the Treasury for the virus loan, presumably a figure decided upon for good reasons by the Treasury, the £800m that has so far been approved only represents 0.25% of the funds available. Approximately how much loan was applied for in total from the 300,000 applications to date? This would give us an idea of the scale of demand. How many more businesses would apply for the funding if the lending criteria meant that they had a chance of success?
A vast number of businesses will need to apply to apply for Government-backed financial support or face bankruptcy. The lending criteria are clearly the reason for the absolute failure of the much publicised Government-backed loans to support business and protect the economy. Good businesses surviving and employing people, immediately start contributing to the economy (GDP, VAT, NI, PAYE, rent, paying suppliers etc..) and the exchequer, reducing the government’s unemployment liability, and helping to prevent the economy from crashing. We should look carefully at what Germany, France and America are implementing with their far less onerous versions of government-backed loans to business. e.g. US Government funding: 10% revenues or 2.5 times payroll + write off of lockdown costs against the loan, 2 years interest free. Timing 1/2 weeks. French Government funding: 5 year interest free loan of 25% revenue. Timing 5 days.
At best, the banks should simply act as a conduit for the Government loan on a similar basis to France or America. At worst, banks should focus on viable business plans in combination with the experience, integrity and competence of the management and not shelter behind pre-set template analysis that does not fit all businesses and certainly not the times.
I am not advocating every loan being approved, but I do believe most should be, because it is economic common sense. There is no short term and little mid-term cost to the Treasury and long term when we are out of the crisis hopefully only negligible losses, as I would guess 80-90% of the loans will be repaid.
Offset this against the risk of crashing the economy with significantly higher unemployment, lower tax receipts, falling GDP, and depressingly low public/business confidence and there is little room for argument. One needs to remember that no one business stands alone. Other businesses rely upon it, from suppliers to landlords as well as the tax receiving parts of the economy. We should also not underestimate the degree to which the ability of our economy to rise up after Covid19 is based upon an emotional response from the country. Mass unemployment and a country full of broken dreams breeds an equally dangerous form of contagion, absolute despair.
In a war the morale of the fighting forces is paramount and the economic war has only just begun.