Should the UK’s Loan Guarantee Scheme, a Lifeline to Fintech, Be Extended?

[Editor’s note: This is a guest post from Ryan Weeks, formerly with Dow Jones and AltFi, covering fintech. This is part one of a four part series he is writing for us on the UK fintech market in the run-up to LendIt Fintech Europe.]

Soon after the UK went into lockdown in March, chancellor Rishi Sunak unveiled his £350bn emergency rescue package for British businesses.

This unprecedented intervention laid the foundation for a handful of government guaranteed lending schemes that have completely changed the fintech lending landscape over the past six months.

The three marquee schemes are the Coronavirus Business Interruption Loan Scheme (CBILS), which offers an 80% guarantee for loans of up to £5m; the Coronavirus Large Business Interruption Loan Scheme (CLBILS), for bigger businesses wanting to borrow up to £200m, again with an 80% guarantee; and the Bounce Back Loan Scheme (BBLS), which offers a 100% guarantee for loans of up to £50,000 for micro-businesses.

The usage of these initiatives alone shows how valuable they have been to UK businesses. As of 16 August, £13.68bn had been distributed under CBILS, and another £3.5bn through CLBILS.

BBLS, despite launching later, became an overnight sensation; more than £8bn had been approved by the time the government issued its first update on the scheme on 10 May. The latest figures show that a grand total of £35.47bn has been lent out through BBLS.

The advent of lockdown in the UK was, to quote one executive at a corporate advisory firm who wished to remain anonymous, “close to disastrous” for fintech lenders. He said that fee income for the big platform lenders in the months of April, May and June was “close to zero”.

For fintech lenders operating in these conditions, the government’s interventions have been a lifeline. Some, such as the UK’s biggest marketplace lender, Funding Circle, have become entirely reliant on lending out money through CBILS – to the point of pausing all other lending and P2P investment.

The platform has brought in new sources of wholesale funding, including fellow fintech firm Starling Bank, to help support its CBILS lending.

In May, Starling agreed to lend £300m to SMEs through the Funding Circle platform under CBILS. The start-up has also lent a great deal more money to its own small business customers directly through BBLS.

Declan Ferguson, chief strategy officer at Starling Bank, said the tie-up with Funding Circle was a neat way for the company to take advantage of its rapidly growing deposit base, which surpassed £3bn in July 2020, up from £600m from this time last year.

There have, however, been complaints that the government did not move fast enough to get fintech lending platforms involved in the first place.

“It would have been great to see more fintech involvement in [the schemes] and earlier on, mainly because from what I’ve seen in the fintech space, some fintechs have a great ability to qualify recipients of lending,” said Liam Gray, fintech lead at Tech Nation, the government funded group.

Responsibility for authorising lenders under the government guarantee schemes fell to the British Business Bank, a taxpayer funded lender.

The big banks were first through the door, but fintech lenders were gradually authorised from April onwards, and there are now at least a dozen approved lenders.

But loans issued under the various government schemes must be funded in the first instance by the lender, and reports from May show that, even after being approved, fintech lenders struggled to get their emergency loan programmes up and running due to the need to put in place fresh agreements with funding providers and set up new special purpose vehicles.

Ravi Anand, managing director at the business lender ThinCats, said his company spent £1m on legal fees alone while setting up under CBILS.

Anand, however, does not agree that it was difficult for platforms to secure funding for emergency loan programmes – so long as the platform in question had experience working with the BBB and institutional investors.

“I don’t think it was difficult to get funders, I had seven offers in two weeks. In fact, investors are desperate to get access to CBILS because it’s so attractive,” he said.

Another issue – highlighted frequently by those lobbying government to harness the capabilities of fintech firms – is the fact that banks were able to finance their emergency loan programmes with funding sourced directly from the Bank of England.

The Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises was introduced on 15 April, allowing eligible banks and building societies to access funding on a four-year term at close to the bank rate.

Fintech lenders, on the other hand, have been reliant on wholesale funding – and the institutions they work with will typically demand a return of between 5 and 10%, according to ThinCats’ Anand.

This gives banks a big advantage in that they can offer more attractive rates than most fintech firms can match.

Anand admitted, though, that it would be a “a challenge for the Bank of England to start giving money directly to lenders” such as ThinCats.

The government’s emergency loan programmes are set to end on 30 September.

Charlotte Crosswell, chief executive of the influential lobby group Innovate Finance, said that while applications close at the end of the month, lenders will have a few more months to process those applications. She added that platforms are seeing a surge in demand for CBILS and BBLS loans at the moment, as businesses load up on credit while the guarantee remains.

Crosswell wants to see further debate about the future of government guarantees in SME lending.

“We don’t believe that we are ready to take away every government guarantee at the moment,” she said.

Sachin Patel, chief capital officer at Funding Circle, agrees.

“The CBILS scheme is a ‘wartime’ scheme, designed for an unprecedented pandemic. We are still effectively in ‘wartime’ conditions and businesses will be affected by that.”

One possibility for the future of the scheme is that guarantees will continue to be offered on loans in sectors that have been particularly badly hit by the pandemic, such as the travel industry.

Ultimately, the real test of the scheme’s success will come when the inevitable defaults start to surface.

It is rather ominous, therefore, that two thirds of loans distributed under the various government-backed schemes have gone to “first-time borrowers”, according to Crosswell.

In time, the due diligence of fintech lenders that were active during this period will be put to the test. It would be a bad look for them to prove a disproportionate burden on British taxpayers.

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