Lending market: where are the banks in the post-covid world and what does this mean for raising finance?
What effect did covid have on the banking world?
We would normally expect a time of high uncertainty as we saw in 2020 and 2021 to prompt a drop-in lending activity. Instead, the Government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan schemes led to an unprecedented surge in borrowing. Many businesses borrowed for the first time and banks talk of having deployed multiple years’ worth of normal lending levels.
The market also saw huge growth in Financial Technology (Fintech), and some secondary lenders focused all their resources on CBILS.
These schemes have now closed, except for the Recovery Loan Scheme, which remains open until June.
21st February 2022
Mark Neath See profile
The extraordinary arrangements may now have made way for a return to normal, but we are not quite where we were pre-pandemic.
The Government-backed schemes overcame one of the common barriers to borrowing: absence of sufficient security.
Prior to CBILS, the Enterprise Finance Guarantee Scheme (EFG) sought to address this issue. EFG was a useful scheme which made many transactions possible that wouldn’t otherwise have obtained funding. However, EFG closed when CBILS was introduced and has not yet been reintroduced.
There is currently, therefore, a gap at the smaller end of the market, where the lack of this support leaves many smaller businesses who don’t have tangible security unable to borrow, whereas they may have been able to do so pre-pandemic.
Frequently asked but not really the right question. We can’t generalise because it overlooks the specifics of individual businesses.
Banks are always lending, that is what they do to make profit after all. Whether an individual bank will lend to a specific business for a specific purpose is a different matter.
When we talk about whether banks are lending, what we’re really talking about is what is the level of risk appetite, requirement for security and approach to each sector. All these policy factors move all the time and are individual to each lender; a “no” from one lender could be a “yes” elsewhere.
Alright, if we try to generalise…
1) For smaller borrowing needs, risk appetite among the mainstream lenders appears to be relatively lower than compared to pre-pandemic, and security is required in more instances, although not always, depending on sector and track record.
2) Many lenders appear to have increased their minimum deal size for unsecured cash flow loans to new-to-bank business, possibly less of an issue for existing customers.
3) For borrowing of larger sums (over £1m) the risk appetite appears to be similar to pre-pandemic levels and there can be competition among lenders for deals.
However, each case needs to be looked at individually.
Again, we can’t really be definitive here, but generally, and particularly for smaller loans, the amount that can be borrowed will often be based on the last reported earnings. Forecasts are important and need to demonstrate affordability.
Sector also matters as lenders understandably remain cautious of those businesses who could potentially suffer a material loss of turnover in the event of any future “lockdowns”, or have vulnerabilities to supply chain disruption, labour shortages and input price rises.
The key to borrowing is of course being able to service the loan, and rates going up certainly affect that. When assessing an application, lenders will always stress-test the projections to see whether higher rates would make the loan unaffordable. The recent rate hikes would already have been built into this, as would the effect of further rises, but if rates increase significantly this might affect the affordability of repayments and hence supress what can be borrowed.