Ranald MacDonald is Managing Director of Boisdale’s Restaurants
In newspapers, so I’m told, a cracking story is known as a “marmalade dropper,” so named because it stops you – and indeed your toast – in your tracks. And that’s exactly what Rishi Sunak’s announcement of a £330bn rescue package for British business to get through the coronavirus package was.
Alas, it appears we lost our marmalade on false pretensions.
The scale and failure of the Government-backed bank loans to reach business seems to be misunderstood by the Treasury and No. 10 alike, and will have terrifying consequences for the economy.
As an owner of a relatively small restaurant business that has applied for a Government guaranteed bank loan, it is worth a dispatch from the trenches.
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 crossfire of the viral war. The issue is the lending criteria for the loan given by the Government to the banks.
Read more: CBILs scheme is under fire from all sides
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 summarized as requiring normal commercial terms.
Joseph Heller didn’t write about bank loans, but this is very much a Catch 22: few businesses prior to the crisis were running balance sheets to support loans they did not want or need; busy as they were investing, expanding or simply bobbing along. Those that did run rainy-day balance sheets probably would not need the loans.
I imagine that if banks in retrospect are seen to have been negligent on the lending criteria set out by the Government, that in the situation of a default they would be liable for 100% of the loan they administered. It is not hard to see a situation in which bureaucrats begin quibbling with banks about due diligence once the immediate crisis is over. Little surprise then that so few loans have been approved despite no shortage of funds.
Around 6,000 applications for a total of just over a billion have been accepted so far. This sounds appallingly low; when you include inquiries to the service, the conversion rate on last count was under 1 per cent.
Yet, horrendous as that sounds, 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 £1.1bn that has so far been approved only represents around a third of a percentage point of the funds available. Approximately how much loan was applied for in total from the 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 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 (GDP, VAT, NI, PAYE, rent, paying suppliers etc..) and the exchequer, 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. In the US the loans have been quickly administered, with a two year interest holiday and the ability to write off lockdown costs. Even in France, not famed for its fast-moving bureaucracy, loans have been administeredd on a 5 year interest free basis up to 25% revenue, delivered within five days of application.
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 the times.
I am not advocating every loan being approved, but I do believe most should be, because it is economic common sense. The ultimate cost of significantly higher than necessary unemployment and crashing the economy bears no comparison to the Government liability from guaranteeing loans of which probably I would guess 80-90% will be repaid.
The Treasury has been chasing its tail to improve the CBILs scheme. They claim it is now moving faster, and that the criteria has been relaxed. The experience in the trenches is that, regardless, the banks need to be brought into line – or simply, other than as a distributor, sidelined.
Yesterday’s announcement that the strict lockdown will continue for at least another three weeks does not suggest that we are on the brink of reopening restaurants and pubs, and restarting the brilliant hospitality industry that makes our city such a wonderful place to live.
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 Covid19 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, absolute despair. In a war the morale of the fighting forces is paramount and the economic war has only just begun.