Community Development Finance Institutions (CDFIs) have been working tirelessly to support SMEs whose businesses have been disrupted by the COVID-19 outbreak. In April they stepped up their lending by 250% compared to the same period in 2019 and have so far lent £46 million to 575 businesses in CBILS-backed loans. In recent weeks demand for new CBILS loans has remained steady, and given the likely long-term economic instability going forward, the UK’s small businesses must be assured that they will be able to access the finance they need to survive after 30 November. A measured introduction of a post-CBILS guarantee will ensure that SMEs do not face a cliff edge in access to finance.
CDFIs deliver critical finance to small businesses and social enterprises to support the social and economic wellbeing of communities. They support businesses to grow and flourish in some of the most challenging communities of the UK, particularly the ‘left-behind’ post-industrial areas and seaside towns. They are therefore natural partners for the Government and the British Business Bank, and deliver a number of funding programmes in addition to CBILS including the Start Up Loan Scheme, the Northern Powerhouse, Midlands Engine and Cornwall and Isles of Scilly Investment Funds, and the Regional Growth Fund.
The precursor to CBILS, the Enterprise Finance Guarantee (EFG) scheme, has been used by CDFIs since 2009 to successfully support small business access to finance. Previous reviews of this scheme showed that businesses experience a significant positive impact because of the EFG-supported loan, enabling them to start up or survive a period of instability. They have also shown the scheme achieved unplanned impacts such as supporting firms to expand or upgrade equipment[1]. The impact of the scheme on productivity and the economy is therefore tangible.
EFG and the CBILS have both also supported CDFIs to raise significant additional capital to on-lend to small businesses, enabling them to increase their impact. A follow-on scheme would enable them to raise more capital from the commercial banking sector and support increased lending to businesses that are viable but unable to access finance on commercial terms. Based on previous funding programmes, we know that for every additional £100 million the sector raises, CDFIs support 3,000 businesses and create and protect over 13,000 UK jobs[2].
The new scheme should take elements from the EFG and CBILS to be most effective. We recommend the Government includes the characteristics set out in our briefing document in its design of the new scheme.
A guarantee is catalytic to CDFIs being able to secure that external finance to lend, and will support small businesses through the recovery and into the future, when access to finance from mainstream sources may become more difficult as happened after the 2008 financial crisis.
CBILS case study: A safe space for key workers
The Comfort Inn is a quaint hotel that lies on the East Cliffs of Ramsgate and has been welcoming guests for over a century. It was able to remain in action during the pandemic, offering a secure environment for key workers and NHS staff as a result of a loan scheme delivered by CDFI Let’s Do Business Finance (LDBF).
Mr. Kanani has owned The Comfort Inn since 1988. Fast forward to 2020, the long-standing hotel rivals competitors as a much-loved part of the local community, promoting ‘something for everyone’ and welcoming tourists, workers and residents alike through its doors. The uncertainty of the COVID-19 pandemic however, left many like Mr. Kanani in a position where expansion plans, and daily work life came to a halt.
Since lockdown began in March 2020, the hotel remained closed to the public, but was able to provide rooms to key workers, including engineers working on the offshore wind farm.
Due to the hotel bar and conference facilities having to remain closed, Mr. Kanani sought assistance from the expert team at LDBF to cover ongoing working capital so when the pandemic was over, he could continue with the businesses’ expansion plans.
As LDBF are accredited delivery partners of the Coronavirus Business Interruption Loan Scheme (CBILS), Mr. Kanani was able to access financial support through the government-backed scheme. This funding enabled the hotel owner to cover wages for staff not on furlough, utilities and supplies so they could continue to deliver a high level of service and offer a safe space to key workers staying in the hotel during the height of the pandemic.
Mr. Kanani said “The support I received was invaluable. Lock down brought us a great deal of uncertainty, so accessing funding through this scheme was the lifeline we needed. I’m hugely grateful for the support of Lisa and the team as we move ahead with expansion plans.”
Now, Mr. Kanani is looking forward to moving ahead with plans to continue with the refurbishment of the hotel bathrooms and the bar area.
[1] Tindle et al (2016) Qualitative Research into the Delivery and Operation of EFG Loans, Prepared for the British Business Bank.
[2] Wynne (2020) Regional Growth Fund Impact Report. Responsible Finance.