The Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS), rolled out during the pandemic, as well as the more recent Recovery Loan Scheme (RLS), have made it clear the Government continues to recognise the vital importance of SMEs to a thriving economy. Against other nations, the UK government delivered a comprehensive support package relatively quickly, enough to keep many vulnerable businesses alive.
Simon Cureton is the CEO of Funding Options, a business finance marketplace. Here he shares his thoughts on how emergency lending schemes have impacted the SME Finance industry.
It’s easy to linger on the negative impact of Covid-19 on the economy, but it is important to remain positive – and there is considerable cause for optimism when we look at the UK’s SMEs. Final data is yet to be released but indicators point to a record number of businesses having been created in 2020. Between June and August, an additional 59,358 new companies were created when compared to the same period in 2019. Faced with adversity, business owners have demonstrated incredible resilience, agility and perseverance. The impact of Covid-19 has seen SME owners rise to the challenge, pivoting their business models and displaying the entrepreneurial grit you’d expect from people driven by solving problems.
Emergency schemes and market distortion
Whilst emergency schemes have been a much-welcomed safety net for UK businesses, failing to fully include alternative lenders in their distribution inevitably led to distortion of the SME finance industry. In accrediting banks to fulfil emergency loan applications, the Government disembarked prematurely from its stated mission to deliver greater choice and competition. Being slow to trust lenders that did not have a heritage stretching back more than a century was both exclusionary and displayed short-term thinking.
Understandably, use of the emergency loan schemes has been well scrutinised. The BBLS promised a less complex process and minimal eligibility criteria to enable vital funds to be delivered at speed. As a result, standard due diligence processes were compromised. As of last month, reports of suspected CBILS and BBLS fraud cases topped 26,000. It took reactive partnerships between the incumbent banks and fintech solution providers to stymie nefarious activity.
Yet, it is access to the Term Funding Scheme that remains the single biggest issue for alt-lenders, depriving them of the advantageous Bank of England credit terms afforded to mainstream banks. Without the capacity to absorb the impact of low interest rates associated with government-backed pandemic financing schemes, innovative market-based lending products have been rendered near-redundant. There have already been some casualties within the alt-lending industry, which might well have been avoided if fintechs had been brought into the fold.
Having distributed over £75 billion to UK businesses during the pandemic, high street banks will likely have a diminished risk appetite and reduced inclination to provide significant further support for SMEs. Consequently, this will hinder the ability of businesses to source, through mainstream borrowing, the capital over-and-above the CBILS and BBLS that will be required for them to thrive, rather than simply survive, post-pandemic.
In this case, SMEs will turn to alternative lenders. Fortunately, while the ecosystem sustained some hefty blows, growth and innovation broadly remains on an upward trend. We have seen new entrants and heightened venture capital backing, which will see the resilient alt-fi community do what it does best.
Alt-lenders are innovating to revive the SME finance industry
Over the past year we have seen an unrivalled level of innovation within UK fintech. For example, data-driven Open Banking, whilst not a particularly new development, saw a significant increase in adoption over the course of 2020. It has the potential to transform the business lending landscape, improving the experience for the customer while also improving security and response times for lenders.
Open Banking minimises the amount of work applicants and lenders need to do to approve an application for credit. For applicants, they will no longer need to send bank transaction documentation to lenders. Instead, Open Banking APIs enable lending platforms to immediately make their transaction history available to lenders, in a safe and secure manner. This was a significant development, ensuring the financial services industry continues to move towards being able to pre-approve businesses for loans based on real-time data.
In driving increased utilisation of new innovations such as Open Banking, as well as digital KYC and AML solutions, the alt-fi industry rose to the challenge to show that speed and due diligence are not mutually exclusive factors in approving loans. It is a valid suggestion that if fintechs had been embraced earlier in the pandemic the number of CBILS and BBLS fraud cases would have been much lower, if existent at all.
Funding Options responded to the urgent needs of SMEs by investing heavily in bolstering its own digital proposition, which has resulted in the team achieving a new record of just 20 seconds from loan application to credit approval, with the previous record being 2 minutes and 56 seconds. This isn’t intended as self-promotion, rather it simply illustrates the speed and efficiency now available to businesses seeking finance through our platform.
In contrast, incumbent banks often have lengthy loan approval processes because they don’t have the technological infrastructure to expedite that process. According to Infosys, in normal times, businesses spend over 25 hours gathering the paperwork for applications before approaching several banks with their application. Successful loan applicants then have to wait for weeks, or even months for the funds to hit their accounts.
It’s clear the alternative finance scene still has the most to offer businesses, despite sustaining some injuries along the way. What is most important now is that SMEs are made aware of the plethora of funding options available to them, beyond the mainstream.
To conclude, emergency lending schemes – whilst not positive in and of themselves for the SME finance industry – have forced the fintechs who exist outside of the mainstream to rally and accelerate their digital agenda in order to compete. Consequently, businesses in the UK will have an enviable system of funding options bestowed upon them in the pandemic aftermath.
What these schemes and their impact have shown is that there needs to be a shift in mentality where the fintech sector is no longer seen as the “cool kid” on the block but is properly recognised as playing a critical role in a crisis of this size. The independent Fintech Strategic Review led by Ron Kalifa OBE concluded that the UK is still a fintech leader, but if we want to retain this position we need to aim to establish a more fintech-supportive environment in order to best enable existing firms to grow, new ones to be born, and to promote the integration of new technologies.