Can digital lenders help more SMEs gain access to COVID-19 relief loans?
How successful have government loan schemes in the UK and US been so far and what’s next?
It’s crunch time for many small and medium-sized businesses (SMEs). The next few weeks will determine the future for a huge number of firms as the pandemic shutdown severely threatens their ability to operate. That means many are in a precarious cash position – unable to make payroll, rent payments or cover bills due to a lack of income.
Governments in the UK and US have launched coronavirus relief loan schemes as part of wider support packages for struggling businesses and employees. These loan schemes promise to provide vulnerable SMEs with emergency access to credit, but promised funds have so far failed to reach the majority.
In the last week, new lenders have been approved to participate in government loan schemes. This includes digital lenders OakNorth and Starling Bank in the UK and PayPal and Intuit in the US. Will this opening up of the schemes be enough to help expand their reach and speed up the flow of funds to SMEs?
What government loan support is available?
In the UK, the government’s Coronavirus Business Interruption Loan Scheme (CBILS) provides loans of up to £5 million for eligible SMEs that are experiencing disruptions in their cash flow and losing revenue as a result of the coronavirus. Eighty percent of the value of the individual loan is underwritten by the British Business Bank, which is working with over 40 accredited lenders to allocate the loans to SMEs.
In the US, the federal government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act initially included a $350 billion Paycheck Protection Program (PPP) to provide loans to SMEs financially affected by the virus outbreak. The US Small Business Association (SBA) approved a selection of banks, credit unions and non-bank lenders to deploy the loans, which are 100 percent government-backed and forgivable if used for payroll, mortgage interest, rent or utilities in the first eight weeks.
The CBILS and PPP have both come under criticism, mainly for complex application processes and slow deployment of funds
Less than two weeks after its launch, the PPP rescue fund ran out of cash and froze applications, both from lenders to join the program and from potential borrowers, leaving many SMEs without access to help. The US Senate has since approved an additional $310 billion in funding for the Paycheck Protection Program, but some are predicting these funds could be claimed even more quickly than they were in the first round.
How successful have the schemes been?
The CBILS and PPP have both come under criticism, mainly for complex application processes and slow deployment of funds from the lenders implementing the schemes.
- UK: UK SMEs have made nearly 28,500 formal applications for access to CBILS since launch, but only around 6,000 loans have been approved so far, according to the most recent figures from UK Finance. That said, total lending has increased by 150 percent in the past week, suggesting that the flow of funds is starting to pick up pace.
SMEs have reported difficulty applying for the CBILS due to paper-heavy application processes that require them to supply large amounts of financial information. Complex eligibility criteria that differs substantially between individual lenders has led to customer confusion, low approval rates and slow fund dispersal by the major lenders. Some lenders' criteria has also been subject to severe criticism for being too harsh.
UK lenders have now been banned from asking for personal guarantees for loans up to £250k and the government has agreed to cover arrangement fees and the first 12 months of interest payments. However, lenders can charge uncapped interest rates on the loans after the first year, which is likely to deter many applicants. This calls into question the extent to which UK lenders should profit from loans designed to be used for emergency relief rather than standard commercial products.
Official bodies were slow in allowing digital-only lenders to take part in the loan schemes
- US: The PPP got off to a shaky start – Bank of America and JPMorgan were the only major lenders that accepted applications on the day the scheme went live. Most institutions only took applications from existing customers, meaning that gaining access to a PPP loan was unfairly dependent on whether an SME’s bank was part of the scheme and their ability to handle large volumes of applications.
A huge initial response to the program from SMEs – BofA reported more than 85,000 customers applied for $22.2 billion of loans on day one – overwhelmed systems and consequently lenders' ability to process applications.
How can digital lenders help?
Official bodies were slow in allowing digital-only lenders to take part in the loan schemes but are now starting to tackle the backlog of applicants.
In the UK, alternative lenders are now being added to CBILS participants; Funding Circle has become the first marketplace lender to be approved. Digital-only banks such as Starling and OakNorth have more sophisticated digital servicing and remote working capabilities than most incumbents. This will reduce the impact of widespread contact centre closures on their ability to process loan applications and provide 24/7 customer support.
In the US, online lenders such as PayPal and Intuit have a proven ability to provide existing SME customers with fast access to credit via their business loan facilities. Direct visibility of customers’ payment processing and transaction data helps quickly determine their eligibility for loans via an automated process. Once the application is approved, these firms are able to deposit funds into the customer’s account in minutes. In the case of coronavirus loan schemes, this technology infrastructure will enable digital lenders to quickly and easily approve applicants and allocate funding.
Lenders and governments need to work faster and more closely together to save struggling SMEs from insolvency
These lenders now need to capitalise on their strong digital capabilities and customer relationships to broaden the reach of government funding and speed up the deployment of loans to SMEs.
Lenders and governments need to work faster and more closely together to save struggling SMEs from insolvency and mitigate any greater harm to the wider economy, including more job losses.
In the immediate term, the PPP urgently needs to get back up and running and reopen applications for SMEs. To help lenders deal with the backlog of requests, the approved additional funding must be released quickly and program guidelines effectively communicated to avoid repeating the chaos of the initial rollout.
Both the CBILS and PPP need to be opened up further to allow more lenders to administer loans and ease the pressure on the large incumbents. A more diverse mix of accredited lenders with varying risk appetites will provide customers, including those who are less creditworthy, with greater choice and a better chance of getting funding more quickly.
At the moment, both the CBILS and PPP are failing to provide the capital that SMEs were promised and many so desperately need. Digital end-to-end customer application processes, combined with simplified and standardised eligibility criteria, will accelerate approval rates and enable funds to be deployed more quickly to SMEs at this time of crisis.
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