Since its start, the coronavirus pandemic (COVID-19) has been affecting the well-being of world economies drastically. As engines of growth in an economy, small and medium-sized enterprises (SMEs) were badly hit by the pandemic. While many countries implemented loan support schemes for SMEs, it is critical to evaluate their impact on SME sentiment and performance. In this article, we turn our focus to the UK, where SMEs provide 60% of the jobs and account for 50% of the GDP [1].

To alleviate the pandemic related effects of revenue losses and cashflow disruptions, the UK government designed and put in place several loan support schemes for businesses. Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Future Fund are examples of such loan supports [2].

Loan support schemes varied in target groups in terms of firm size, loan amounts, offered forms of financing, personal guarantees, and repayment grace periods. CBILS, for instance, provided support to businesses up to £5 million and covered the first 12 months of interest and lender-levied fees. The schemes were available through accredited lenders since March 2020 and gave lenders a government-backed guarantee for the loan repayments. The new applications to loan support schemes closed on 31 March 2021. The total value of facilities approved up to this date totalled £47.36bn for BBLS, £26.39bn for CBILS, and £5.56bn for CLBILS [3].

According to the Bank of England Bankstats data [4], gross bank lending to SMEs in 2020 was £103.7 bn, which marked its highest value since 2012. The 82% increase in gross bank lending compared to 2019 was largely driven by loan support schemes. The total value of the most relevant schemes (BBLS & CBILS) drawn down from banks accounted for 55% of the gross lending in 2020 (this is a rough estimate since populations and products covered in British Business Bank and Bank of England datasets are not identical) [5]. Figure 1 shows that gross bank lending peaked in Q2 2020 following the opening of BBLS and CBILS applications. After a 324% increase in May 2020 relative to April 2020, gross bank lending levelled off in subsequent months.

Repayments also increased during Q2 2020 (Figure 1) due to SMEs repaying pre-existing loans with the borrowed facilities, then fell due to the loan support scheme’s grace periods and payment holidays offered by banks. Nevertheless, net lending reached £46.8 bn in 2020, a markedly higher value than £1.9 bn in 2019 [6]. According to BVA BDRC’s Q2 2021 SME Finance Monitor (survey commissioned by industry body UK Finance and undertaken by BVA BDRC which interviews 4250 SMEs in the UK each quarter), 21% of SMEs increased their use of financing in Q2 2021 (including 11% new borrowers), with a 96% of approval rate in loan support schemes [7]. This boost in credit availability contrasts with the tight credit conditions SMEs faced during the 2008 financial crisis. In the aftermath of the past crisis, net lending to SMEs had recovered in seven years [8].

Figure 1: Gross and net flows of bank lending to SMEs in the UK.
Source: Bank of England Bankstats

Credit has also been more affordable for SMEs, since the Bank of England Bank Rate cut of 65 basis points in March 2020. The effective interest rate on all SME loans declined from 3.29% in December 2019 to 2.32% in December 2021 [9]. Consequently, loan support schemes have resulted in improvements in SME sentiments on credit availability and affordability during the pandemic. According to the Federation of Small Businesses (FSB) indices (survey commissioned by The Federation of Small Businesses and undertaken by Verve which interviewed 1561 SMEs in the UK during June-July 2021) [10], the percentages of SMEs rating credit availability and affordability as “good” or “very good” increased in Q2 2021 compared to pre-pandemic levels as illustrated in Figure 2.

Figure 2: FSB indices showing the percentage of SMEs in the UK that rate credit availability and affordability to be “good” or “very good”.
Source: FSB Voice of Small Business Index, 2021-Q2

SME sentiment in Q2 2021 has improved compared to Q2 2020: According to BVA BDRC’s report [11], the percentage of SMEs rating their mood about the business as “good” more than doubled to 54% in Q2 2021 from 25% in Q2 2020. The report highlights that the share of SMEs expecting very limited income in the next few months, seeing pandemic and economic climate as a major barrier, and considering redundancies have significantly dropped in Q2 2021 compared to Q2 2020. A similar increase in optimism is also observed in the FSB Small Business Index [12]: Measured by the number of small businesses expecting an improvement in the performance over the coming quarter, the index recorded 18.6 in Q2 2021, a major increase compared to a record low of -143.4 in Q1 2020 (Figure 3). Despite the improved sentiment, the percentages of SMEs having grown and having made a profit in the past year are still muted compared to pre-pandemic levels [13].

Figure 3: FSB indices showing the prospects for SMEs in the UK over the coming three months.
Source: FSB Voice of Small Business Index, 2021-Q2

Loan support schemes have positively impacted the SME sentiment overall; however, their effectiveness was limited mainly for two reasons:

Although the percentage of SMEs reporting a need for funding and reporting a funding event in the past year increased compared to pre-pandemic, the majority of SMEs were cautious regarding financing: According to BVA BDRC’s report, “only 3% of SMEs considered themselves as ‘would-be-seekers of finance’ and 78% had been ‘Happy non-seeker of finance’ in Q2 2021”. Despite a 96% approval rate in loan support schemes, only 19% of the surveyed SMEs approached those and 40% reported an injection of personal funds [14]. These findings highly relate to SMEs concerns about loan repayments and uncertainties about the future. The SME funding gap was also widened by the fact that “more than 50% of SMEs consider only one provider when seeking a loan, with 25% put off by the hassle or time taken, and relatively higher rejection rates when applying to a new provider” [15].

Secondly, the channelling of loan support schemes to SMEs disrupted the ongoing SME funding trend: The Bank of England Open Data for SME Finance report [16] states that “since 2017 all of the net growth in SME lending came from smaller banks and alternative sources such as peer-to-peer lending”. Loan support schemes, however, benefited traditional lenders at the expense of challenger and specialist banks, and marketplace lenders. British Business Bank 2020/2021 Report states that challenger and specialist banks only provided 12% of the loans under support schemes at the end of 2020 [17]. For marketplace lenders, accreditation to lend via loan support schemes was particularly challenging due to their business models. As borrowers shifted to loan support schemes through traditional lenders and refinanced their marketplace loans with them, marketplace lending volumes contracted for the first time in 2020 [18]. Overall, the total amount of approved facilities was £76.31 bn when the applications closed, which accounts only for 25% of the £330 bn of guarantees, announced on 17 March 2020 by the Chancellor of the Exchequer Rishi Sunak [19].

In conclusion, loan support schemes increased access to financing for SMEs by accounting for more than half of the gross lending to businesses in 2020. Coupled with favourable interest rates, they helped improve the SME sentiments on credit availability and affordability. With loan support schemes, SMEs future expectations recovered on several fronts, resulting in an overall improvement in the SME sentiment. This positive impact was however hampered by SME’s approach to financing and the disruption of alternative lending channels that had been playing a vital role in small business finance markets. The Bank of England has addressed these issues in its Open Data for SME Finance report [20] emphasizing that the development of an open platform that delivers a portable credit file for SMEs could ease such frictions in the financial system. Faster and easier access to financing could boost the demand for and supply of credit to SMEs.

Despite the improvements and a forecast of 7.7% GDP growth [21], risks remain for SMEs in terms of rising input costs, paying out salaries, potential defaults, and hence resulting in higher inflation and unemployment on a broad level. 45% of SMEs who were granted loan support already used most of the facilities [22] and interest rates are rising to pre-pandemic levels which will make further borrowing much harder. A new scheme called the “Recovery Loan Scheme” was initiated on 6 April 2021 to counter this [23]. Nevertheless, high levels of indebtedness and uncertainties about the new variants of COVID-19 pose critical risks on post-pandemic economic recovery. The grace period for the past loan support schemes has recently come to an end and more colour on SMEs repayment abilities and further financing needs will be available in the coming months.

References

[1, 8, 15, 16, 18, 20] Bank of England – Open Data for SME Finance, March 2020

[2] British Business Bank – Coronavirus Business Interruption Loan Schemes

[3] HM Treasury – Covid-19 Business Loan Schemes Statistics

[4] Bank of England Bankstats

[5, 6, 9, 17, 18] British Business Bank - Small Business Finance Report 2020

[7, 11, 13, 14, 22] BVA BDRC – SME Finance Monitor

[10, 12] FSB Voice of Small Business Index, Quarter 2, 2021

[19] UK Government, Chancellor of the Exchequer Rishi Sunak on Covid-19 Response

[21] CBRE - UK Economic Outlook July 2021

[23] British Business Bank – Recovery Loan Scheme