The Business Landscape – Post Covid-19

Whilst we remain firmly in the grip of the pandemic and enormous pressures are still evident in every aspect of life, the vaccine and its extremely efficient roll out brings thoughts of a post-pandemic world.

I’m not sure a pre Covid world will return, reminders and remnants of the virus will last for many years and behavioural changes, structural ones, will, I think be evident.

Its possible, I think, to look at the economy post Covid, without factoring in Brexit implications, the general flavour of the changes will not alter, Brexit or not.

By way of business, the next few years will be challenging, but for good, responsive, adaptable businesses potentially very rewarding.

In the short term businesses will be faced with repayments of Government backed facilities and there will be a dramatic rise in business failures, in all sizes of businesses, with the corresponding damage to future funding.

I expect HMRC to be very active and whilst sympathetic to businesses where Covid has impacted this will only be to a point.

Banks may find Government Guarantees (as they relate to CBILS and BBL) are not as solid as anticipated as the level of fraud will be higher than may have been expected; Banks will react in their usual way and consequently conventional bank funding in a post Covid environment may become limited.

This will offer scope for alternative financiers and I anticipate increased activity levels for the non-bank sector. This will bring opportunity aplenty for invoice and asset financiers, with a place at the table for peer to peer business lenders. (The latter must be clearer in advising retail lenders of their possible risk and must improve their credit policies)

For the economy as a whole I do not think the damage done will be as bad as some are predicting. The retail sector was going through seismic changes, regardless; the virus has simply accelerated this. Commercial property will likewise undergo a period of change, structural in its nature, not just via the upheaval on the High St but attributable as well to a shift in overall working practices crystallised by Covid-19. This has the capacity for far reaching implications in all sorts of areas, not the least of which being for pension funds.

The end of lockdown will be characterised by a period of, effectively, quantitative easing as cash saved, or at least not spent, during lockdowns, will enter the economic system. This will stimulate many, but not all, sectors. Certainly it seems safe to assume hospitality will benefit, although its equally safe to assume many outlets will not have survived.

I’m looking forward to a busy spring and beyond and to seeing businesses once again thrive.

Coronavirus Business Support

Just before Christmas The British Business Bank released statistics revealing the level of funding granted by way of the Coronavirus Business Interruption Loan Scheme, Bounce Back Loan scheme, Larger Business Interruption Scheme and the Future Fund

The totals are stunning; £68Billion provided across the 4 schemes to over 1.5Million businesses.

The Bounce Back scheme has provided £43.5Billion from 1.381Million loans, suggesting an average loan size of just over £30k.

CBILS totals are £19.6Billion across 82618 loans, giving an average of £237k, and the numbers for Larger Business Interruption Scheme are £4.97Billion lent across 675 loans (average, £7.3M)

At the moment the schemes are scheduled to end on 31/1/21.

As we approach the anniversary of the schemes beginning, repayments will start to fall due and, over time, delinquency rates will be interesting to monitor and I guess will be a long way away from historic delinquency rates that may be expected in non-pandemic times.

Anticipate a big year for the Insolvency Profession and HMRC’s attitude will be crucial.

Peer to Peer Lending

As I have written in previous posts I take a keen interest in the peer to peer sector, particularly those facilitating loans to businesses.

Often it seems the platform demonstrate a far greater grasp of technology than they do with credit policy and it seems ( as at Christmas 2020) another P2P platform is heading towards an insolvency process.

Again, to state the obvious, if a platform is offering returns of 10% + then please apply the greatest possible scrutiny to the borrower. If a lender (investor) is being offered 10% return it means the borrower will be paying in the region of 12%; at the moment money to SME’s is cheap, even if not being sourced via any of the Governments Coronavirus initiatives.

Therefore you have to ask why a viable business would go via the P2P route when conventional money is available, if that question cannot be answered satisfactorily then money should not be ‘invested’ across P2P platforms.

Conventional funders, including the invoice and asset financiers are very much open for business.

CoronaVirus Business Support

Figures released on 22/10/20 from British Business Bank reveal the level of support given thus far to UK businesses, since the start of the pandemic.

Via the Bounce Back Loan Scheme £40.2Billion has been provided to over 1.3million businesses, suggesting an average loan size of £30k.

Via the CBILS some £17Billion has been lent to just over 73k businesses indicating an average loan size in the region of £230k.

Via the Large Business scheme £4.5Billion has been provided to 623 businesses with an average therefore around £7Million

Overall, including the Future Fund (£770Million) support totals £61.9Billion. A staggering figure. I have written previously about concerns and these concerns and observation remain valid.

Late Payment Culture

Late payment has hindered businesses for as long as can be remembered, with large organisations often the worst culprits.

Companies invoice for their work and should expect payment according to the terms quoted; every day payment is not received erodes the suppliers margin and every day that passes also heightens the concern that payment may not be received at all.

Late payment and the impact it has on cash has historically been one of the principal causes of business failure.

Many large businesses use the shabby tactic of delaying payment in the full knowledge they are potentially causing serious problems to suppliers; its almost a machismo trait that is not at all edifying and is, in effect, nothing more than a sharp practice of which those that use the tactic ought to be ashamed.

Technology means there really is no excuse for not adhering to terms, in previous times businesses could use tired stories of cheques in post, payment runs, signatory needed and so on with none of these applicable any more.

Covid-19 offers a new excuse to those habitual late payers; a recent survey by Bibby Financial Services suggests over half of UK SME’s are being paid later as a result of the pandemic.

Whilst the pandemic has brought understandable cash flow issues there remain, cash generative and cash rich businesses who are abusing their position to squeeze suppliers even further.

Familiar with the issues brought about by late payment, we can and do help businesses, both with appropriate cash flow advice and with assistance, if needed, with collection work.

Should we be worried about the CBILS?

Today, 7th October 2020, the National Audit Office issued a report into the Bounce Back Loan Scheme, whereby Government guarantees of 100% of loan value were given to accredited lenders who provided loans from £2k to £50k to businesses.

Anecdotally there have been stories doing the rounds of businesses applying for loans either fraudulently or with such weak financials they would never normally pass any form of credit process; so it was always likely fraud and delinquency levels would be materially higher than those to be expected in a non-Covid environment.

The preliminary central estimate in the NAO’s report is that 35% to 60% of borrowers may default but does qualify this remark adding that the estimate is ‘highly uncertain’.

If the actual figure is anywhere close to this estimate then its deeply troubling for two reasons, firstly it will add to the overall economic impact of the virus and secondly, from a human behaviour perspective, it means that a lot of people have deliberately and maliciously set out to exploit this pandemic to satisfy their own avarice.

CoronaVirus Business Interruption Loans

Incredibly there are now over 90 lenders accredited by The British Business Bank to offer loans under the CoronaVirus Business Interruption Loan Scheme (CBILS); a full list is accessible here.

There are far fewer accredited lenders offering support under the Bounce Back Loan Scheme, with only 27 listed today, 19th August 2020

Statistics are not published (or at least I cannot find them) that reveal how much each lender has lent under the various schemes but the aggregate now stands at over £52Billion, with over 1.23million businesses supported.

The schemes may close in the Autumn although there’s a certain amount of ambiguity in dates quoted; what’s for sure is that the schemes will have to end after which SME’s in need of finance will have to revert to conventional sources.

Its at this point that good, reputable lenders will have a crucial role to play, structuring appropriate facilities, suitably secured, enabling UK SME’s to survive and thrive a (hopefully) post Covid-19 environment.

If a post Covid-19 business environment is likened to a post recession then alternative financiers will be busy and experienced brokers have a profoundly important part to play.

Peer to Peer Lending

There may be trouble ahead. I take a keen interest in the P2P sector having worked closely with two of the platforms.

I use assorted research tools including those that enable me to search businesses by secured lender. The results from a few P2P platforms are troubling given the apparent deterioration of their books with some of their borrowers looking to be in deep financial trouble.

Almost by definition those businesses that borrow over P2P platforms will not be the strongest financially. They will be paying higher rates than available via conventional sources, not only to give those that are lending a good return but also to feed the platform itself, and their costs are not insignificant.

If borrowers, in numbers, start to fall into some kind of insolvency process or disappear completely then the sector will struggle to survive and a lot of investors will lose capital.

As a broker, talking to businesses looking to borrow, P2P borrowing would be a long way down the recommendation list. Were anyone to ask about the merits of lending across a platform, then extreme caution needs to be exercised. Funds are not covered by the Financial Services Compensation Scheme so never has the phrase ‘Capital at Risk’ been more appropriate.

CoronaVirus Business Support

New figures from the British Business Bank released on 4/8/20 reveal that the level of support given to British businesses is now over £50Billion

The largest element of funding has come via Bounce Back Loans (£2k to £50k), with the cumulative value of approved facilities totalling £34.34Billion and with over 1.1m businesses approved an average loan size of just over £30k is evident

£13Billion has been approved under CBILS (up to £5m) across just short of 59k businesses suggesting an average loan size of just over £220k.

With more lenders being added to the list it will be interesting to see where the numbers end and particularly interesting to see what level of delinquency becomes evident over time.

Why some lenders have bothered getting accreditation is a mystery as there are some who simply wont lend still.

Peer to Peer Lending – Growth Street

More news (July 2020) from the P2P lending sector as Growth Street, a facilitator of loans up to £1m to UK SME’s describe themselves as being in a ‘Resolution Event’ at the conclusion of which it will ‘aim to cease business activities and wind down its operations’

I guess the statement is open to interpretation, and those SME’s currently borrowing from Growth Street (their statistics page suggests 86 current borrowers with an average funds in use just under £150k, suggesting an overall book size of just under £13m) will need to seek funds elsewhere. Of course right now that will present some borrowers a real headache.

The statistics page indicates an expected default rate of 5.04%, so those investors who lent funds across the platform may anticipate some erosion of their capital.

It really reiterates what has been said before, both here and elsewhere, and I suspect will be said again. Peer to Peer business lending is a high risk strategy, be careful.