Default rates will rise, and small lenders may pause funding to at-risk sectors despite the introduction of the government’s business interruption loan scheme, a business finance specialist has warned.
According to Rangewell’s latest Lender Pulse report, the economic impact of the coronavirus will have a rapid and indefinite impact on the way that small business funding is managed.
Because of uncertainty from the pandemic, a number of peer-to-peer lenders are slowing the withdrawal of funds from their platforms for retail investors and some have even put in place emergency events which will allow them to hold investor money for nine days to avoid a ‘run’ on their platforms.
Most lenders have now pulled out of all lending to the hospitality, retail and travel sectors unless borrowers have strong and continuing cash flow. However, the Lender’s Pulse report added that very few businesses are expected to meet this criteria.
“The business interruption loan scheme will see a huge demand in a very short period of time,” said Nic Conner, research consultant at Rangewell.
“The key will be how fast the high street banks, who will be delivering the scheme, can get the funds to a business.
“There is a danger that banks will cherry-pick firms who are not in the red at-risk zone to issue the business interruption loan scheme to and that bureaucracy and fraud checks will be too slow.
“We are seeing at-risk sectors such as the hospitality, retail and travel sectors being turned down on mass for finance.
“As much as the business interruption loan scheme is welcomed by lenders it does seem to be a solution from the last war; that is to say, it supports lenders with liquidity during a wholesale credit squeeze.
“This crisis is more to do with lenders not wanting to bring borrowers onto their books who will very likely not make repayments from month one.”
Numerous small lenders have paused lending, likely due to being too busy dealing with problems from current borrowers. Those lenders who are still lending to at-risk sectors are working with trusted specialist introducers to manage deal flow and quality to ensure they don’t waste time.
Rangewell added that it was also seeing a number of lenders, both small and medium-sized, having their wholesale funding lines pulled or frozen.
This was one of the reasons that lenders failed or stopped lending in the last financial crisis.