The government is facing growing calls to offer 100 per cent guarantees on loans through the coronavirus business interruption loan scheme (CBILS).
The emergency measure, introduced by Chancellor Rishi Sunak earlier this month, currently offers an 80 per cent guarantee on loans to small firms, leaving the remaining 20 per cent of the risk with the lender.
But critics say that this has slowed down the process of channelling much-needed funds to struggling businesses amid the health crisis and Sunak is now considering offering 100 per cent-guaranteed loans of up to £25,0000 for small firms, according to a report in the Financial Times.
Frank Wessely, partner at business advisory firm Quantuma, said this would help significantly by encouraging banks to operate more quickly.
“This would help banks work closer to the speed at which some European countries are able to provide assistance to businesses, compared to how slow it is here,” he said.
Similarly, Lee Tillcock, editor of business at Moneyfacts, said an increase to a 100 per cent guarantee from the government, alongside a longer loan repayment schedule, would lead to more businesses receiving the funding they need.
“These measures delivered via a streamlined documentation process can see the CBILS initiative provide businesses with the access to funds that they so desperately need if they are to survive this crisis,” he said.
Mike Cherry, national chairman of the Federation of Small Businesses, welcomed reports that the Treasury is set to increase its guarantee, but added that banks need to do more.
“It’s good to hear that the Treasury is set to embrace our recommendation to provide 100 per cent guarantees on loans with values up to £25,000,” Cherry said.
“Doing so will help to get far more cash to far more of the firms that need it – businesses that have had to pay March’s payroll and ongoing overheads with no revenue coming in.
“This is only one piece of the puzzle, however. A lot of banks need to make back office adjustments to ensure that they can issue commercial loans of this size, as they are often subject to the terms of the Consumer Credit Act.
“They must do so swiftly if this change to the CBILS terms is to have a meaningful impact.”
However, Mark Turner, managing director, regulatory consulting at Duff & Phelps, said that increasing the guarantee could result in a ‘catch 22’ situation.
He said a 100 per cent guarantee would mean finance delivered quicker to firms but could lead to funding in an uncontrolled way with fewer checks, while having an 80 per cent guarantee means lenders would undergo more thorough checks but may be slower.
“I see the pros and cons of both,” Turner said.
“The government should be more active and if it’s becoming apparent that the 80 per cent guarantee is slowing down the process of getting money out to businesses, then it’d be sensible to consider moving upwards to perhaps a 90 per cent guarantee.
“The government has to be dynamic and adapt to the ongoing changing situation.”