The UK’s mainstream banks forgoing their multi-billion pound dividend pay-outs for the year should be well-received, but commercial lenders are still caught between a rock and a hard place when it comes to providing loans, says CVR Global’s Ian Defty.
When we look at the way every sector, banks included, have reacted to the Coronavirus pandemic, it is clear to see that we, as a nation, were unprepared for this sort of crisis.
And understandably so. Nobody could have foreseen a situation whereby just about everybody would be required to stay at home for a potentially prolonged period of time – it is unheard of unless you go all the way back to World War Two, and even then you could physically socialise!
A major business implication of this unprecedented situation is that owner-managers simply cannot forecast future income, or cashflow, based on any previous trading period, as they normally would when applying for a loan, simply because they have never traded through a situation such as this before.
Naturally, banks want to know how businesses, coming to them for a loan of any kind, will have the wherewithal to repay it. Through the newly created, Government-backed business interruption loan – which is available via various commercial lenders – borrowers will receive a 12-month interest free holiday, with the Government paying their interest charges and any associated fees from the lender.
Ultimately though, liability for the overall loan lies with the borrower, and as a result banks are remaining cautious when making loans – even after discussions with the Government.
Usually a business would point to how well they have performed based on past performance and like-for-like periods, but one could argue that all of that is weakened by the fact that we are heading into the unknown. The past is no longer necessarily an indicator of the future.
Hospitality businesses, for example, can no longer rely on this summer for a bumper takings period to convince banks to lend, and are just one sector that could struggle to gain assistance from banks, regardless of how much Government guarantee is given.
The other side of the argument is that businesses need cash now to tide them over. The British Chambers of Commerce today released results from a Covid survey of more than 600 businesses, which revealed that 44 per cent only have up to three months’ worth of cash reserves, while 18 per cent have just one month’s worth of reserves.
The usual process for handing out loans can on average take weeks – regardless of the size of security and/or personal guarantees on offer. So, there is a great deal of pressure on the banks and other lenders to have enough experienced business advisors to resource and process an expected influx of new loan requests.
Many will assume that the billions of pounds the Treasury have put aside to meet the current crisis and its business support will boost banks’ confidence when it comes to granting quick, short-term loans, but in reality, the banks still have a duty to take a responsible approach to lending to ensure firms don’t end up plunging themselves into a longer term crisis for short-term gain and to sift out possible fraudulent applications.
The Government should be applauded for their efforts in trying to keep this country’s businesses alive – because, the truth is that if companies with small profit margins don’t receive help in the form of a loan holiday or additional capital to ease their cash flow – then we will see a wave of closures.
However, I don’t believe it is realistic to expect the banks to hand out loans without doing their normal due diligence, and a fine balance needs to be struck when seeking to support those companies in need.