Coronavirus bounce-back loan scheme will prove largely ineffective and costly to our economy
Seasonal businesses are effectively looking at a year without earnings, says Drew Hendry MP | PA Images
Loans will not save the economy, they won’t retain jobs in the medium to long term, and they won’t give families the security they need through this crisis.
When is a business viable? As anyone with a knowledge of starting or running a business will know, the answer is at best a guess, as it is subjective. Yet that is what the Chancellor is asking banks to retrospectively assess to allow desperate claimants to access his new ‘Bounce Back’ loans.
Many businesses are not viable just before they are. Take seasonal businesses; how many rural hotels and restaurants are viable over the winter period? What about those who have just borrowed to expand but haven’t seen the fruits of their efforts yet?
I’m sure there is the exception to the rule, but how many start-up enterprises are viable from the very outset and how can you judge whether or not they will be? Many have already had their bank’s answer; their application for a Government-backed loan has been unsuccessful.
The UK Chancellor claims to have put £330 billion of financial support behind businesses, but in reality, that money is not reaching the majority of SMEs’. Indeed, thus far only a tiny percentage of this money has made its way to small and medium-sized enterprises. Of the initial 130,000 loan enquiries made, banks granted around 1000 loans, and as of this time, only around 2% of businesses were able to access these loans. This money is not even close to reaching most small and medium businesses, making the argument for replacing this failing loan scheme with grants, now overwhelming.
Few businesses can afford to carry months’ worth of spare cash, and many are now finding cash flow drained, even with Furlough. Another real danger to their future is that earnings are pushed months back, seasonal businesses are effectively looking at a year without earnings. Further grant aid, taken from the money put aside for the loan guarantee scheme would give those businesses and many others a fighting chance of rebooting.
I believe the Chancellor to be well-meaning over this loan initiative, and he is straining to bend it to become effective. Still, it is an endeavour that will prove largely ineffective and costly to our economy overall because the vast majority of the money is not going anywhere, much less where it is most needed.
It’s easy to understand why he asked banks to run this scheme; it seemed like a natural fit - they have existing infrastructure and should be able to mobilise teams to deal with the applications.
However, their appetite for risks are pretty low when it comes to small businesses in normal times, and even with the original Government scheme, we saw them revert to type. With reports of them seeking personal guarantees, not just businesses but homes on the line for the borrower – it just can’t be that way in this crisis. The banks built-in risk-averse approach has some justification when viewed through their prism.
After all, they are already setting aside hundreds of millions of pounds to cover expected bad-debt through this Covid-19 emergency. They are also anticipating loan and credit defaults on a colossal scale.
For that reason, amongst others, it is plain to see that they are not the right place to assess the viability of the businesses the Chancellor has pledged to support through Covid-19 and therefore these loans, with few exceptions, are not the answer. Even with 100% Government backing, given the sheer scale of this economic crisis, banks will be assessing these loans with a risk-averse critical eye.
Banks will, by their very nature, require pre-existing relationships with businesses and with many local branches shut, there is little room for knowledge of the local economy. Ultimately, a point scoring system will decide the fate of applicants for their hard-pushed local businesses.
The International Monetary Fund has likened this crisis less to the financial crash of 2008 and more to the ‘Great Depression’. This time, it is smaller businesses, the sole traders, the community enterprises who need help most. Yet they face losing out on two fronts because even if they manage to access these loans, all they will be doing is pushing their problems further down the track.
Of course, it is essential to ‘buy time’ during this crisis period but the time when the real bounce back is needed is still months away in reality. With an uncertain future ahead of us, it would be inappropriate to sell these loans as if they will jump start business. That simply lacks credibility.
What use is £330 billion if it doesn’t get cash to the base, directly into supporting our communities and local commerce. Loans will not save the economy, they won’t retain jobs in the medium to long term, and they won’t give families the security they need through this crisis. Only financial support via grants will do that.
Drew Hendry is SNP MP for Inverness, Nairn, Badenoch and Strathspea nd SNP BEIS spokesperson.
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