Mistakes Made In The Coronavirus Business Interruption Loan Scheme - AND How To Start Correcting Them.

Posted on: 26/04/2020

The Coronavirus Business Interruption Loan Scheme (CBILS), launched with a fanfare of trumpets by the UK government, is only worth a tune on a tin whistle.

I said at the outset that it had to include a 100% government guarantee, like a similar scheme run by the German government.

Instead, it was launched with a 80% government guarantee. Despite some adjustments to the detailed provisions e.g. personal guarantees can only be taken on loans over £250,000, the government has so far refused to move to a 100% guarantee. Banks have to exhaust all recovery options before calling on the partial guarantee available from the government.

So we now have a situation that, instead of tens of thousands of small businesses being saved by this scheme, a mere 16,000 loans had been granted as of last week. The average value of those loans is £170,000, which surely demonstrates that most really small businesses in need are not being supported. 

If the government had offered a 100% guarantee, they could also have exerted a measure of control over the interest rates applying to the loans.

In the United States, a scheme similar to CBILS limits the interest rate to 1%.

The UK government, if CBILS had included a 100% guarantee, could have imposed a maximum interest rate to be charged. Even 8% would have been significantly better than rates I have heard are on offer under the 80% guarantee arrangement.

Of course, some will say that losses on loans not recovered would have been much greater if a 100% guarantee had been implemented.

So lets do some sums.

Lets assume the government had set a maximum of 8% interest for a 100% guaranteed CBILS.

The government is paying the interest for the first year of the loan term.

If CBILS loans had totaled £10 Billion, this would have left the government with an interest bill of £800 Million to cover first year interest.

Instead, under the 80% guarantee, interest rates will be much higher - probably at least double the 8% assumed above where a 100% guarantee applied.

A 16% interest rate, given a £10 Billion loan pot, would leave the government with a £1.6 Billion bill for first year interest.

In other words, with a 100% guarantee the government might have saved £800 Million in first year interest. This could have been used to offset any losses the government faced due to banks falling back on the guarantee.

One issue is, of course, that because the guarantee is only 80%, the amount of loans granted is NOT going to reach £10 Billion - and tens of thousands of businesses that could have been saved by a loan may well go to the wall instead.

Apparently, the government is now, at last, considering offering a 100% guarantee on loans Under £25,000. This would help the really small businesses that the Press Releases told us CBILS was aimed at supporting.


Why would any loans of that size have been granted? Under the 80% guarantee, Banks with any commercial sense are bound to prioritise larger loans to bigger - and, in theory,less risky - businesses. The banks earn more interest  AND higher arrangement fees ( which the government also covers) on larger loans.

Faced with only a partial guarantee, nobody can blame the commercial banks for being commercial. It is their duty to their shareholders to behave in this manner.

It would have been easy for the government to listen to experts at the outset and to have implemented CBILS with a 100% guarantee.

Instead, they have exposed themselves to the accusation that CBILS was never intended to lend the substantial sums of money the UK's small businesses need if they are to survive the pandemic.

There is still a little time left for the government to refute negative accusations by, at a minimum, offering a 100% guarantee on loans up to £100,000. 



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