When the Chancellor of the Exchequer Rishi announced the mind blowing financial support package he presented to bolster and protect the economy from Coronavirus most people in the business community could not believe the amounts involved. It is vital to understand that the business community and the loans to support the small and medium-size enterprises were presented first in his line of defence against economic uncertainty and which he no doubt believes wholeheartedly will enable the economy to bounce back once the virus is brought under control allowing our community and economy to start again.
Who is Rishi Sunak?
Until the Coronavirus hit with vengeance in March he was a guy that was made Chancellor February 2020. Now he is the economic leader of our country’s fightback against the Coronavirus. His background is in the city where he worked as a hedge fund manager for an investment bank and is married to the daughter of an Indian billionaire. From those who have worked with him closely he is thought highly and has a keen analytic mind.
His conduct and quite frightening levels of financial assistance being offered to our economy through the business community and individuals is testament to his own ability at seeing how incredibly serious situation we find ourselves in. Not just in relation to the medical aspect of Covid 19 but the economic impact now, in the short term and also in the long term to businesses and individuals alike.
What did the Chancellor of the Exchequer offer to the Business Community and why?
There were over the space of several days just after the middle of March some incredible announcements of financial assistance to both businesses and individuals.
- Business loan support by the way of the Coronavirus business interruption loan scheme to a value of £330 billion (CBILS). Importantly, more if required.
- Support for larger businesses through a Covid-19 corporate financing facility.
- Support for business through the Coronavirus job retention scheme. With 80% coverage of salaries up to £2500 per month for three months. Again with more if necessary.
- Deferring VAT payments for one quarter. With more if necessary.
- Delaying self-assessment payments.
- Supporting those who are self-employed against declared income to the tune of 80% for three months.
- Business rate grants of £10,000 and £25,000 to help the retail, cafe, hospitality, hotel and accommodation businesses.
- Similarly support for other businesses like nurseries and those who pay little or no business rate with grants of £10,000.
- Time to pay service with HMRC.
As with any scheme there are winners and losers but all in all it is an enormous package and one that the Chancellor and government advisers have said since the announcement will be added to if required.
What is the Coronavirus Business Interruption loan Scheme (CBILS)?
The Coronavirus business interruption loan scheme is managed by the governments bank ‘the British business bank’. Through them and the accredited lenders loans will be provided for small to medium-sized businesses. The vehicle used is historic and was formerly known as the Enterprise Finance guarantee scheme. Up until June 2019, 35,000 loans were drawn down under the scheme with lending a total value £3.3 billion. So 10 years across 40 lenders about 3500 loans were made each year to the value each year of £330 million.
On those figures, the scheme being supported by the banks which Rishi so desperately needs to get on board, to get that £330 billion pounds into the economy in the next few months has used a lending vehicle and trusted the banking sector where they have only been capable so far of supporting lending in a 12 month period at less than .1% of the amount they need to lend annually.
The figures involved are mind blowing regarding the loan scheme now in place. If every one of the 6 million small to medium-size enterprises that qualify applied and received monies, each business would have approximately £60,000 available to them and don’t forget this is the starting point. More would be made available if required.
The number of loans the banks lend to anyone time 2019 stood at just over £400 billion. In effect and in one fell swoop the Chancellor wants the banks to lend double what they have in the marketplace over the next three or four months.
What are the qualifying requirements to obtain these loans?
The eligibility that the government requires is straightforward.
- A UK based business in its activity.
- An annual turnover of no more than £45 million.
- A borrowing proposal which the lender would consider viable were it not for the current pandemic. Basically if the business profitable and has a history of profitability or performance.
- Self-certifying that the business has been adversely affected by the Coronavirus Covid 19.
Why does he need these Businesses so Badly?
He has provided incredible support for employees and now the self-employed again with mind blowing sums. Basically he is covering everybody’s wage to the tune of 80% for the next three months and again he will extend this if necessary.
He needs the small and medium-sized business to take on this borrowing so that they can survive, open and rebuild once our economy is allowed out of its current isolation. The government can only fund wages and not receive tax revenues for a limited amount of time. This small and medium-sized businesses in taking on these loans are providing the government with a commitment that they will take on this responsibility after this period regardless of the potential risk to themselves and their businesses in such an uncertain world. Where with the loans the government is backing the business by guaranteeing to the banks 80% of any monies lent.
Why are the Banks so bad at Promoting the loan Scheme?
The banks we understand are due to profit if they lend all £330 billion an initial fee capture of £30 billion in relation to fees they are charging the government for supplying the borrowing facilities, which the government itself is backing to the tune of 80% of the loan value lent.
However there is more to this in that the banks will then charge interest on the borrowing facilities. The banks will of course argue there are various market forces which impact on the revenue in relation to interest charged. Basically they will try and charge as much interest as possible. However banks should associate interest rates applied to a borrowing facilities against the level of risk. This is why residential mortgages are particularly low in interest charged on that is calculated on the affordability income value property et cetera et cetera. So there risk is 20% on the face of it, but actually none at all if you see the calculations.
Business propositions are of course riskier now but this risk has been almost completely negated by the government’s backing to the tune of 80% on the value of the loan. Needless to say the banks will charge interest and the likely figures to be somewhere around 10%. An appalling figure in mind their lack of exposure to loss but one that we can again use in relation to how much the banks will make from this if the £330 billion is lent. In the first year the 10% equates to £33 billion.
On top of this, loans will be repaid over a period of up to 6 years so let’s just take the average loan repayment calculated over four years. So in our calculation we take £330 billion and divide this by four. In the first year of repayment by the business and let’s face it is likely to be able to pay back the repayment because they are not meeting any interest as the government is covering this in the first 12 months. The loan book would reduce by £82.5 billion to a level of £247.5 billion.
So let’s now re cap on the banks risk in relation to this and question why on earth they are adverse to not letting go of their years of bureaucracy and inability to adjust to a corporate climate requiring speedy decision-making to get these loans out into the business community. With the help of very simple mathematics we will see how badly the banks are now behaving. This is not just profiteering, this is the corruption of our economy and society by the banks who are holding us all to ransom.
- £330 billion total lent
- £30 billion initial fees charged
- £33 billion interest charged in the first 12 months
- £247.5 billion loan value after 12 months
- £49.5 billion the level of risk to the banks after 12 months on a loan book outstanding of £247.5 billion.
The risk we are assuming is entire in that the security taken to cover the 20% on loan facilities over £250,000 are not realised whatsoever and of course that no payments are made on these loans by any of the firm’s in the future after the 12 months.
So in short banks risk after 12 months is £49.5 billion. Offset against this they have earnt £63 billion. So after 12 months they will have a net profit of £13.5 billion and that’s if after this time no one pays there money back!
Now we must not forget the Chancellor did say he would put more money into this if needed so this is a minimum.
The Economy is split
Our economy and society is in an incredibly unusual place. There are some who are involved in leisure, holiday, hospitality, retail and social businesses like pubs and restaurants where there has been an immediate and catastrophic impact to business and staff in addition to the supply chains that they also use.
Then you have the businesses which are not directly involved in that sector and who may for several weeks seen a spike in activity but due to supplies from home and abroad contracting rapidly are now facing closure with the knock-on effect of staff being sat at home.
You then have the area of business and employment which remains unaffected or indeed is booming. You only have to see Tesco’s to realise the increase in sales that they are seeing. Households where employees are either banking staff or government paid from teachers through to civil servants will only see a difference relating to the lockdown and their inability to socialise. The pensioners who don’t have borrowing commitments or that are not facing financial upheaval, but who should with the lockdown be limited in going to the shops daily, not that they seem to have stopped! For them this will be just incredibly inconvenient.
On the one hand there is complete carnage, upheaval and economic distress and on the other there is just the upheaval element. Sadly there is a lack of understanding as to the massive impact that this will have on our society and economy as we go forward but eventually every household will experience this affect. If the banks don’t start doing what is right very soon the greater the negative impact this will be.
Is there a light at the end of the Tunnel?
For the Chancellor’s economic plan to have any chance of working all elements must be utilised. The business loan scheme was the first and most important aspect of this, yet after only a couple of weeks it is failing miserably. The banks have defaulted to their normal setting of profiteering, self-preservation and bureaucratic ignorance. Where speed is of the essence and every day sees more businesses ending, this situation must change quickly.
There are businesses who lend money who are more than capable of quickly and effectively providing finance and these are the new finance providers that sprung up following the 2008 financial crisis. Unless we have forgotten, the crisis which was caused by the banks. These companies which are referred to as Fintech or Peer to Peer lenders have the capabilities of quickly and effectively lending money to businesses. We understand that they are in talks with the Treasury who already support them through other lending products and platforms to obtain accreditation to roll out the Coronavirus business loan scheme.
If they do become involved, businesses and individuals will shift both now and in the future to the way they conduct their business. The memory of the banks attitude today will not be forgotten, certainly by the business community. Moving forward, this might be the defining moment that ends the banks monopoly and sees their obese and self-centred business models come crashing down!