BBB reveals 45% of SMEs sought finance in 2020, although future demand remains up for debate

Catherine Lewis La Torre (pictured above), chief executive officer of BBB, said: “This has been an especially challenging period for smaller businesses with external finance playing a vital role in business survival in the face of the pandemic. The BBB has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”

In an effort to examine the outlook for growth and future demand for finance in 2021, the survey was undertaken between August-November 2020, taking into account the views of 4,125 small businesses (with less than 250 employees).

Government-backed loans over asset finance

Interestingly, many businesses opted to use government-backed finance schemes and support instead of the traditional forms of finance such as asset finance, bank overdrafts and credit cards. The usage of loans rose to 25% in 2020, up from 10% in previous years.

According to the report, the rise of government-backed loans is reflected in BBLS and CBILS lending data, which shows around 1.5 million facilities approved by the end of 2020. The use of government grant funding by businesses also increased significantly, from 2% in 2019, to 31% in 2020.

As expected, 89% of businesses seeking external financial support in the past year did so because of the impact of the pandemic.

Additional uses of financial support included:

• To help with cashflow concerns (75%);
• To pivot or change their business model (8%);
• To invest in the digital capability of their business (7%).

FSB forecasts 250,000 SMEs to close

The report also revealed that 50% of SMEs that accessed the BBLS and CBILS schemes had borrowed more than 20% of their turnover. Despite this, only 23% of SMEs had spent all of their facilities by Q3 2020, with 19% stating that they had not spent any.

On the topic of turnover, decline rates for businesses of all sizes were over three times their respective prior five-year average, illustrating the scale of disruption across all businesses. However, the smallest SMEs experienced the largest declines in turnover.

Furthermore, the high cash balances and rising debt levels indicate that whilst borrowing is expected to continue amongst a sizeable number of smaller businesses in 2021, an equally sizeable number are likely to struggle with debt repayments.

Over 2 million UK SMEs have taken out numerous Government-backed loans since the onset of the pandemic, and are now facing repayments that, according to the Federation of Small Businesses (FSB), could see the demise of around 250,000 businesses within this next 12 months alone.

Fraud to lessen demand for finance

When CBILS was launched, thousands of complaints arose at the extensive time it took for companies to receive the funds once they had applied for the scheme. The funders accredited to lend under CBILS were finding it very hard to get accredited by the BBB and when they did get accredited, it took them time to implement systems changes.

The government’s knee-jerk reaction to this was to introduce the BBLS which hardly sported any constraints, meaning that virtually any company could receive a loan. Many critics felt as though the lack of checks helped to draw in many companies who could have survived without the loan, and yet took one anyway because it was ‘free’.

Consequently, HMRC have setup a large department to track the loans given to customers who took advantage of the scheme and may not have needed the loan to survive.

In January, the BBB partnered with PricewaterhouseCoopers (PwC) to examine cases of possible fraud across the business loan programmes. The bank also began working with government fraud bodies and the industry to mitigate fraud and credit risks, although one estimate found that defaults and fraud in the bounce back program for small business could reach 80% in the worst case.

Figures released in 2020 by BEIS and the BBB suggest that 35-60% of borrowers may default on the loans, which would result in a cost-to-government of £15-26 billion assuming the scheme lends out a total of £43 billion.

At the time, Matthew Cox (pictured above), managing director EMEA, fraud, security & financial crime at FICO, said: “When the bounce back loan scheme was set up, the government rushed so fast because they needed to, and they didn’t put all the normal controls on loans at the bank level. For example, to qualify a business had to have been established before 1 March 2020. Also, there was very little proof of business health needed. As a result, the fraud is estimated at £15-26 billion.”

In contrast to the BBB’s forecast for demand for finance in 2021, another concern is that due to the bounce back loan fraud, many companies will not need to access finance as they have already received the funds from the BBLS. This could make it difficult for funders and independent lenders to find their market again and to reach normal levels of borrowing once the pandemic subsides.

On the brink of survival

Whilst the Chancellor has offered businesses the option to extend repayment terms from six-years to ten, many SMEs believe this will only delay the inevitable for small businesses on the brink of survival, says to IW Capital.
Prior to the announcement of the March budget, the investment firm stated that more practical support was needed that enabled sufficient recovery to promote future growth.

Luke Davis (pictured above), chief executive officer of IW Capital: “Throughout the year we have seen such a fast injection of cash into SMEs in the form of Government-backed loans, that are simply not tailored to the business’s growth trajectory. This has therefore left these businesses in a worse off position than before, as are now drowning in debts that they cannot pay off. Yes, the Government has introduced schemes that aim to aid the repayment of these loans, but overall they will just delay the inevitable unless we see a more practical solution.

“Funding from private investors will be a key part of our economic recovery and the success of small businesses that were previously creating jobs at a rate three times as fast as large firms. Private debt is much more manageable and flexible than Government debt, so encouraging investment into these businesses is something that needs to be promoted and supported.

“Private capital has proven to be fundamental in helping UK businesses weather the storm, and recover and grow post-pandemic. Investment into UK SMEs, and the extension of EIS and loan support schemes, would be far more efficient than any Government loan scheme and vital to the resurgence of the UK economy, with the SME community making up 99.9% of private sector businesses.”

Moving towards recovery

Some 37% of smaller businesses expected to stay the same size in 2021 while 33% expected to shrink, and 4% to sell or to close. Some 21% were expecting to grow, compared to 28% the previous year.

SMEs in business services (25%) and production (23%) sectors were most optimistic about their prospects for growth over the next year, with businesses in construction and other services sectors least optimistic (both 17%).

The Bank offers a wide range of interventions aimed at supporting venture and growth capital including British Patient Capital, and the Recovery Loan Scheme. This ensures that businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing COVID loan schemes close.

Chirag Shah (pictured above), chief executive officer of Nucleus Commercial Finance, said: “The British Business Bank and the lending industry have played a vital role in ensuring SMEs have had access to the crucial funds they need to survive during the pandemic. Over the past 12 months we have seen fintech and alternative lenders move into the mainstream due to their ability to provide SMEs with funds quickly and, as a result, more businesses now turn to our industry as their first point of call.

“The impact of Covid-19 on SMEs will be long lasting, so we need to see continued innovation across the industry to provide creative solutions which suit businesses’ individual needs. We firmly believe fintech lenders are best positioned in the industry to support SMEs thanks to the ability to design flexible products, powered by cutting-edge technology. Future innovation will further reinforce that fintechs can no longer be considered an alternative; we are the true mainstream lender.”

Founded in 2014, the BBB is the UK government’s economic development bank. It primarily aims to make finance markets for smaller businesses work more effectively and manage SME access to finance programmes across the UK.

The BBB’s core programmes support nearly £8 billion of finance to almost 94,800 SMEs. Since March 2020, the Bank also launched four new business loan schemes in response to the pandemic, delivering more than £72 billion of finance to over 1.5 million businesses.