Coronavirus: Pressure grows to reform emergency business loan scheme with just £2.8bn lent so far

Switzerland, Germany and Hong Kong among countries that have rolled out funding to firms more quickly than the UK

Business secretary Alok Sharma struggled to explain on Thursday why British banks have agreed just £2.8bn of lending under a government-backed scheme designed to keep small and medium-sized businesses afloat through the coronavirus pandemic.

MPs on the House of Commons Business, Energy and Industrial Strategy Committee grilled Mr Sharma on why Switzerland, Hong Kong, Germany and other nations had been able to deliver multiple times the amount of emergency funding to businesses than the UK had.

“In terms of the [Coronavirus Business Interruption Loan Scheme] ... the latest figures being published today are showing that so far there are around 28,000 applications to date and 16,600 businesses have secured a loan, representing a total value of £2.8bn,” Mr Sharma said.

The amount is less than 1 per cent of the £330bn of loans and £20bn of grants and tax relief announced by chancellor Rishi Sunak last month.

Switzerland has given out 98,000 loans – almost six times more than the UK, despite having a population one-eighth the size.

Its loans are 100 per cent guaranteed by the state, compared with 80 per cent in the UK, and are delivered to businesses in 24 hours after they fill out a one-page application.

In the UK, businesses have complained of facing reams of paperwork asking detailed questions about their finances, as well as high rejection rates and delays in receiving funds.

Thousands of firms are thought to be in danger of running out of cash within weeks unless they can access financial support.

Asked why more than 90 per cent of the government’s £350bn of financial support to businesses came in the form of loans rather than grants, Mr Sharma said it was important to look at the “totality” of the support being offered.

That includes the furlough scheme which 387,000 employers have now applied for to cover 2.8 million people’s wages. Larger firms have received £11.2bn through a credit facility with the Bank of England while 500,000 SMEs have had grants totalling £6bn, Mr Sharma said.

He added: “I think you have to look at the totality of what we are offering ... if you look at what the Swiss are offering in terms of fiscal stimulus, as I understand the majority of it has gone through these particular loan schemes.”

Mr Sharma conceded that there was a need to “get more loans out there” but said that the number of accredited lenders had increased to 48 with the addition of peer-to-peer platforms like Funding Circle.

Figures released on Thursday by banking trade body UK Finance show that 16,624 of the 36,186 small business finance applications for CBILS facility have been processed and approved. The average value of a CBILS loan stands at £171,000. Business groups say that is not enough and are calling for urgent changes to the scheme.

Tej Parikh, chief economist at the Institute of Directors, said: “It is positive to see the scheme ramping up, but cash still needs to get to more businesses quickly. Reforms have started to bed in, and more money is getting out the door. However, there are still swathes of businesses facing processing delays and restrictive viability criteria, and many are reluctant to engage with the system at all.”

He urged the government to relax affordability criteria for small loans and to increase state backing for lenders’ losses.

Federation of Small Businesses (FSB) chair Mike Cherry called on banks to consider firms at the heart of communities such as small shops, restaurants, gyms, manufacturers and mechanics, many of whom are looking for relatively small loans.

“These figures mark an improvement,” Mr Cherry said. “But we need to see far more from the banks where the speed of processing applications and making money available to the smallest businesses are concerned.

“The government should up its guarantee on emergency loans with values under £30,000 from 80 per cent to 100 per cent. That, combined with the streamlined application process that should be in place for facilities of this size, should help to get more cash to the small firms that really need it.”

Part of the problem is that while the government is backing up to 80 per cent of banks’ losses on the loans, that still leaves them on the hook for 20 per cent. Given the potential size of the scheme, that represents a risk that some lenders appear reluctant to take.

Banks may also need to change some of their operations to allow them to approve commercial loans under £25,000 because of consumer credit rules.

Bank of England governor Andrew Bailey suggested last week that the government should look at guaranteeing business loans under £25,000 so that banks can avoid carrying out standard credit checks that have blocked some applications.

“Is there a case [for 100 per cent guarantees] for very small firms that account for quite a high volume of applications? Would it unblock things to change the risk appetite for those firms?” he asked.

Treasury officials are understood to be concerned about potential abuse of the system if guarantees are increased to 100 per cent. But those fears must be weighed against the danger of exacerbating economic damage caused by the pandemic if thousands of businesses run out of cash and go bust.

Mr Sharma also said he would look to introduce measures to ease commercial rent demand within the next week.

“I do think the majority of landlords and tenants are working well, they are reaching agreements on debt obligations but I am certainly aware that certain landlords are putting undue financial pressure with aggressive debt recovery tactics,” he said.

“What I’m very happy to say to you is I will look to introduce temporary measures on this particular issue which will ease commercial rent demand and protect the UK high street ... that is something I will be doing very very shortly.”