An immediate impact of the winding up of the scheme has been extended decision times from lenders as they struggle to deal with increased demand alongside the transition away from RLS. We expect this to be temporary and start to return to normal within the coming weeks.
In March 2021, the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme, and the Bounce Back Loans all ended, forcing businesses to transition to the end of an era of government loan schemes and the imminent return to pre-pandemic lending. Between all three schemes, the government paid out a total of £80 billion, according to HM Treasury, not including the Recovery Loan Scheme.
An immense amount of capital flowed freely to struggling businesses, and the shift back to pre-Covid lending will be challenging. Below we’ll discuss the many innovative lending solutions available and how accountants can guide business owners to the product best suited to their business needs.
How did government-backed lending distort the market?
During the pandemic, the government guaranteed 70-80% of the loan value for lenders. This state-guaranteed mechanism delivered welcome support for small businesses, allowing lenders to minimise risk through a government guarantee. While necessary as an emergency response to the crisis, should wide-ranging government-supported loan schemes continue, they could affect the economy’s long-term health.
During the pandemic, business owners receiving government loans weren’t required by lenders to include a personal guarantee — standard practice in pre-pandemic lending, one of the few ways to mitigate risk. Now, with the return to traditional lending, accountants need to ensure that their business clients benefit from the favourable terms of government schemes and are aware of this requirement.
What is a personal guarantee?
A personal guarantee refers to an individual’s promise to repay finance if their business can’t and is asked by lenders if they have concerns over your business’s credit history, age or financial stability. Usually offered unsecured, personal guarantees aren’t held against specific individual assets such as property, with your client instead of being held personally responsible for paying any debts should their business fail.
However, a personal guarantee can bring benefits to business owners. Personal guarantees can help your businesses get credit when they aren’t as established or have an inadequate credit history to qualify on their own.
During the pandemic, lenders were not allowed to take personal guarantees alongside the government guarantee. However, with the removal of this security blanket, lenders must now return to taking individual deposits. The existence of government-backed funding has shifted expectations in the lending market over the past two years, not only around personal guarantees but also interest rates.
Interest rate changes
The Recovery Loan Scheme acted as a “middle ground” between what came before and the broader alternative lending market. Interest rates, for example, were capped at just 15%, which may have restricted lenders in supporting those businesses who fall into ‘riskier’ credit bands that typically have carried rates of 15-20%. So, in a way, a return to marketplace lending broadens SME access to finance.
With most government-backed lending falling away, accountants must be on the lookout for a marked shift in interest rates and advise their business clients respectively. Low-risk businesses will likely pay lower interest rates than RLS, and higher-risk businesses can expect to incur higher rates. It will take several months before the market recalibrates and interest rates return to pre-Covid levels.
Post RLS lending landscape
With government support reducing, lenders are quickly reintroducing their pre-Covid lending products. Importantly, this includes using their underwriting criteria rather than that stipulated by the British Business Bank. Be sure to remind your clients that, despite this being an exciting time for businesses as the SME lending market gets back into gear, post-RLS lending terms will depend on the type of business finance they apply for.
RLS versus BAU comparison
It’s essential for accountants acting on behalf of businesses looking for finance to know the differences between the government-supported Recovery Loan Scheme and the many alternative finance options on the market. In many cases, options offer more choice and increased control, such as unsecured term loans and revolving credit facilities. Each has its advantages and disadvantages and can suit different types of businesses.
An unsecured term loan, for example, might be the perfect choice for your client seeking funding without the need to offer security. In contrast, unsecured loans could be an excellent opportunity for the client who doesn’t own many assets or is growing fast and needs finance quickly. With various lenders on the market able to offer unsecured loans of up to £15m, options are available for any situation.
Another option worth discussing with clients is a revolving credit facility. This type of credit enables them to withdraw money, use it to fund their business, repay it and then withdraw it when needed. It’s one of many flexible funding solutions on the alternative finance market today.
Other types of products that are now available
Now that the government is reducing its support, many alternative lending products are worth discussing with your business clients. While both lending criteria and the underwriting process have changed, many innovative funding options are out there to power their next phase of growth, with some of the more popular products being:
Merchant Cash Advances
Merchant cash advances are one of the most innovative products in alternative business finance. They allow small business clients to use a card terminal to secure funding — a perfect option to discuss with clients with limited assets but an adequate volume of customer card transactions.
Advantages
- Flexibility: Your client only pays back the loan when they receive customer card payments with repayments linked to sales, allowing them to manage their cash flow better.
- Access: Depending on the lender and application process, SME clients could be approved for a merchant cash advance within 24 hours.
- Unsecured: Merchant cash advances are a type of unsecured business finance. Your clients aren’t required to put forward any collateral, making it less risky than traditional, secured financing.
- Risk: Repayments are automatically taken from the money your client receives from customer card payments, lowering the risk of them defaulting on their loan and avoiding late payment fees.
- Transparency: The amount they pay back doesn’t change. The lender will clearly state the total repayment cost at the outset.
Asset Finance
Asset finance is a quick and convenient way to manage working capital for businesses by borrowing against their balance sheet assets (inventory, accounts receivable). A clear benefit for both you and your client here is efficiency. Working capital management can be quantified using accounting ratios, allowing you to compare your client’s business against different standards using the figures from their balance sheet.
Advantages
- Faster access to capital when compared to traditional bank loans
- Fixed repayments aid cash flow management
- Agreements have fixed interest rates
- Failure to pay results in the loss of the asset, nothing more
Invoice finance
Invoice finance allows your business clients to borrow money based on what their customers owe to their businesses. It uses unpaid invoices to represent any sums paid to them, avoiding the usual wait for the payment terms. These can be anything from 14 days to 90 days (or more). Invoice finance ensures your clients get the finance they need quickly, so they’re not waiting to get paid.
Advantages
- The clear advantage of invoice finance is that your clients are in control of raising cash quickly for their businesses. It can be made available as soon as an invoice is issued and used for growth to buy more stock or pay wages.
- Invoice financing has a speedy turnaround compared to other business loans.
- No risk to assets. Invoice financing is an unsecured business loan in place of the business’s invoices, so they won’t have to offer up physical assets as collateral.
Credit history and interest rates
When your client, or you as their trusted advisor, applies for a loan, a lender will need to gain comfort over the businesses ability to pay the loan back and will involve some or all of the following steps:
- When an application is made for business finance, most lenders will do a credit check to help establish its financial health. Typically, banks will use one of the leading credit score checkers, such as Experian or Equifax, and your client’s businesses will be scored out of 999. Credit rating is one of the most valuable indicators of what interest rate they’ll pay for a business loan.
- As well as looking at your client’s business’s credit history, lenders will also run personal credit checks on key personnel, i.e. company directors. This is particularly relevant for start-ups, who haven’t had time to establish a credit history, or for sole traders.
- As well as credit scores, there are other factors that lenders might consider when deciding a borrower’s eligibility. For example, limited companies might look for information on Companies House to see if a business has reported its accounts on time.
- They may also check that the business has paid its current tax liabilities. So be sure that there are no late payments of taxes or incorrect filings, as this could result in credit being rejected.
Create a Funding Options Connect account
By joining Funding Cloud: Connect, you can help your clients navigate the post-RLS lending landscape. Our award-winning technology searches the market to accurately and quickly match businesses with the right lender and finance option for their needs.
We cover dozens of lending types and over 120 lenders across the market, from cash-flow finance to revolving credit facilities and merchant cash advances. Join today to ensure your clients get the funding they need to trade, plan, and grow with confidence.
