23 February 2021: MPs including Sir Iain Duncan Smith, the former leader of the Conservative party, have backed calls to the Chancellor to inject £25m into the community development finance sector to boost the UK’s recovery and support the “levelling-up” agenda.
Kevin Hollinrake MP, chair of the All Party Parliamentary Group on Fair Business Banking, Danny Kruger MP, author of the “Levelling Up Our Communities” report commissioned by the Prime Minister, and Sir Iain Duncan Smith have supported a proposal to the Spring Budget by Responsible Finance, which represents the UK’s Community Development Finance Institutions (CDFIs).
CDFIs are not-for-profit, non-bank lenders which provide responsible finance and support to small businesses, the self-employed, social enterprises and individuals. They have a long track record of supporting viable businesses which have been turned down by banks. They have a particular focus on sustainable job creation, deprived regions and lending to BAME-led and women-led businesses.
This proposal calls on Government to:
1. Replace historic EU CDFI funding programmes with £25 million from the UK Government, and
2. Require UK high street banks to provide match funding of £25 million to CDFIs.
Doing so will maintain the capacity of CDFIs to lend to those unable to access Government Covid-19 borrowing schemes or obtain bank finance.
Research by the LSE, City UK, McKinsey and Bank of England shows as many as a million small businesses and social enterprises are at risk of failing in the next year without the right support. Organisations including the CBI and FSB have warned businesses may plunge over a cliff edge at the end of March, saying support is desperately needed for an economic recovery to take place.
Meanwhile banks are expected to tighten their lending criteria as they did after the 2008 financial crisis, and do not have the branch presence or specialised expertise for ‘higher touch’, higher risk lending decisions. CDFIs can “go where others fear to tread and are a proven support mechanism for businesses and social enterprises,” says Theodora Hadjimichael, chief executive of Responsible Finance. “Many businesses will be coming out of the crisis in a weakened state. They will need support to reopen, rebuild and grow.
“We know from over two decades of experience that businesses with fluctuating revenues, payment defaults and debts on their balance sheets are unlikely to be accepted for a bank loan, even if that loan will help them to grow and regain profitability. This is where CDFIs have historically stepped in, pulling businesses back from the brink and helping them grow, create jobs and improve productivity. We stand ready to do this now.”
Sir Iain Duncan Smith said:
“Across the UK, tens of thousands of entrepreneurs have started and grown businesses of all sizes thanks to the valuable work of CDFIs. Their local expertise, commitment to social impact and ability to reach businesses, social enterprises and people in the regions, sectors and communities most impacted by the pandemic mean they are crucial to the UK’s recovery. Greater support for CDFIs from government and banks will ensure businesses have access to a wide and diverse variety of funding as they rebuild, so entrepreneurs and the jobs they support can thrive once more.”
The policy would cost the Government nothing, according to Hadjimichael:
“Our policy is overall neutral in terms of spend. The £25 million EU replacement grant is an offset to historical UK contributions to the EU, and will be matched by new private capital. It will get money into communities all over the UK and give a lifeline to some of the two million businesses and people who fall between the gaps of existing Covid-19 support schemes.”
A previous Government investment of £30m into community development finance in 2012 overdelivered against the Government’s targets, she said, unlocking £90 million in lending which supported 2,500 enterprises and created or sustained over 11,700 jobs in many of the most deprived regions of the UK.
Many CDFIs have participated in the Government-backed CBILS scheme, through which the government guarantees 80% of the finance to the lender if the borrower cannot repay. But this means their capital to lend to small businesses is depleted because unlike banks, CDFIs don’t have access to the Bank of England’s Term Funding Scheme.
Hadjimichael added, “Guarantees are of enormous use, protecting our capital in the event of a future default, but they are only part of the solution. The EU has improved its support for CDFIs to guarantee 90% of the risk on small loans. Our members need greater access to appropriate sources of capital to lend too.
“Governments around the world are recognising the vital role that CDFIs play in protecting businesses from the economic fall-out of Covid-19. The US Government has granted $12bn to CDFIs to help support viable businesses through its new stimulus package. This has encouraged banks and corporations to further invest into CDFIs for community and small business recovery. In the UK the Government and banks must do the same.”
Case study
(more case studies featuring a wide range of CDFI-supported businesses from all over the UK are available)
Extrupol Packaging in Lincolnshire has seen demand for its products increase threefold to help the UK’s front-line battle against Coronavirus. A new £50,000 loan from CDFI Finance For Enterprise enabled the 13-employee firm to fulfil an enormous new order for a range of sterile packaging, which will be used to protect sterile surgical equipment, uniforms and cleaning products, helping to reduce exposure to NHS staff working in hospital operating theatres, intensive care units and hospital wards.
Marina Wittey, Financial Director of Extrupol Packaging, said: “We have worked with a specialist supplier who provides sterile cleaning products, uniforms and surgical equipment to the NHS for more than 20 years. When our products enter the healthcare environment, they must meet stringent safety standards. We were approached to fulfil an order which was three times larger than a typical one and we knew it would place significant pressure on our cashflow. Having worked previously with Finance For Enterprise, we called upon them for help.
“From the outset Finance For Enterprise understood our business model and helped us to secure the funds we needed to fulfill our orders. The time taken between securing a lending decision and being able to draw down the funds happened within just a few days. As a result, new products are now rolling off our production line and will be quickly distributed to hospitals; something which wouldn’t otherwise have been possible.”
What next?
- Theodora Hadjimichael, Chief Executive of Responsible Finance, can comment about access to finance for businesses, social enterprises and people. Please contact Jamie Veitch on 07904 272 200 / [email protected]