The Government is failing
The scale and failure of the much lauded CBILS seems to be misunderstood by the government and the media - and this will have terrifying consequences for the economy, reports Ranald Macdonald
April 24 2020
As the owner of a relatively small restaurant business that has applied for a government guaranteed bank loan (CBILS) I would like to make the following point.
The percentage the government guarantees of the virus loans is not the reason for the dismal failure of the initiative to aid the recovery of businesses currently in intensive care who, through no fault of their own, have been caught in the cross fire of the viral war. The issue is the lending criteria for the loan given by the government to the banks.
The media focus is currently on the government to reduce the banks liability and offer 100% government guaranteed loans. Whilst not unwelcome this does not make much difference if it is the businesses that are to repay 100% of the loan, which the vast majority will do. The real issue is that businesses are unable to obtain the loan in the first place due to the lending criteria, which is summarised as requiring normal commercial terms. It’s a bit of a catch 22: few businesses prior to the crisis were running balance sheets to support loans they did not want or need, and those that did probably would not need them. I imagine that if the banks in retrospect are seen to have been negligent on the lending criteria set out by the government, then in the situation of a default they would be liable for 100% of the loan that they administered. Little surprise then that so few loans have been approved despite no shortage of funds.
On Monday 13th April it was reported in various newspapers that 4,200 or 1.4% of the 300,000 virus loan applications for a total of £800 million had been accepted so far. This sounds appallingly low and an average of £19,000 per business is not an impressive figure (though the situation is actually dramatically worse than even these figures would suggest and demands more investigation). Of the £330 billion put aside by the Treasury for the virus loan - presumably a figure decided upon for good reasons by the Treasury - the £800 million that has so far been approved only represents 0.25% of the funds available. But how much loan money was applied for in total from the 300,000 applications to date? This would give us an idea of the scale of demand. How many more businesses would apply for the funding if the lending criteria meant that they had a chance of success?
A vast number of businesses will need to apply for government backed financial support or face bankruptcy. The lending criteria are clearly the reason for the absolute failure of the much publicised government backed loans to support business and protect the economy. Good businesses surviving and employing people immediately start contributing to the economy and the exchequer (GDP, VAT, NI, PAYE, rent, paying suppliers etc) by reducing the government’s unemployment liability and helping to prevent the economy from crashing. We should look carefully at what Germany, France and America are implementing with their far less onerous versions of government backed loans to business - for example the US government are funding loans of 10% of revenue or 2.5 times payroll plus writing off lockdown costs against the loan with two years interest free (implemented in one to two weeks), and the French government are funding a five year interest free loan of 25% revenue (implemented in five days).
At best the banks should simply act as a conduit for the government loan on a similar basis to France or America. At worst banks should focus on viable business plans in combination with the experience, integrity and competence of the management and not shelter behind pre-set template analysis that does not fit all businesses and certainly not in these turbulent times. I am not advocating every loan being approved, but I do believe most should be, because it is economic common sense. There is no short term and little mid-term cost to the Treasury and long term when we are out of the crisis hopefully only negligible losses, as I would guess 80 to 90% of the loans will be repaid. Offset this against the risk of crashing the economy with significantly higher unemployment, lower tax receipts, falling GDP, and depressingly low public / business confidence and there is little room for argument. One needs to remember that no one business stands alone. Other businesses rely upon it, from suppliers to landlords as well as the tax receiving parts of the economy. We should also not underestimate the degree to which the ability of our economy to rise up after COVID 19 is based upon an emotional response from the country. Mass unemployment and a country full of broken dreams breeds an equally dangerous form of contagion with absolute despair.
In a war the morale of the fighting forces is paramount - and the economic war has only just begun.
Ranald Macdonald is the founder of Boisdale restaurants and the Editor & Chief of Boisdale Life magazine