A joint blog by Theodora Hadjimichael, Responsible Finance, and Chris Wilford, The Confederation of British Industry (CBI)
Reports in the Financial Times and other media suggest it’s not a matter of whether there will be a successor to the Recovery Loan Scheme but what it will look like. Both the CBI and Responsible Finance gave detailed proposals to Treasury about a long-term loan guarantee scheme. How it is designed will be fundamental to business confidence, resilience and growth.
Government-backed support schemes saved businesses, jobs and livelihoods during the pandemic, with lenders working closely with firms of all sizes to provide critical cash flow support. The Recovery Loan Scheme (RLS) has subsequently been vital in helping businesses navigate uncertainty and approach recovery.
Even before COVID-19 the Enterprise Finance Guarantee supported up to half of SME lending from Responsible Finance members. These impact-driven community development finance institutions (CDFIs) break down barriers to finance. They play an important role in a diverse, innovative finance market. Most businesses they say “yes” to had been turned down by a lender, yet nine out of ten repay their loans, create jobs and grow their businesses.
Research also shows lending supported by guarantees produces a benefit-cost ratio of £7 to £11 for every £1 of taxpayer funds. That’s without accounting for the vast, positive social impact of CDFIs’ loans in deprived areas and to disadvantaged groups.
To be effective a long-term growth guarantee scheme must help businesses which typically can’t access finance elsewhere. Around 230,000 viable and well-established businesses, many led by female or black entrepreneurs, or based outside London and the South East, can’t get the finance they need to grow every year. The All-Party Parliamentary Group (APPG) on Fair Business Banking described a critical shortage of finance for small businesses.
Meanwhile SMEs now face a cumulative burden of cash flow pressures, late and long payments, higher energy prices, loan repayments and skills shortages, all while continuing to navigate the effects of both Brexit and COVID-19. If confidence and ability to invest plunges, the economy is at serious risk.
Entrepreneurs in the UK don’t lack ambition, talent or strategy. CBI members are now more willing to use finance to support their growth, served by a diverse lending market where simple, fair and flexible guarantees have a role to play.. The CBI has called for a Growth Guarantee Scheme to succeed the RLS, which should increase access to funding to SMEs in critical sectors, should not distort the market and must not marginalise non-bank lenders. And social and wholesale investors, MPs, policymakers, and academics say a fit-for-purpose long-term loan guarantee scheme is vital to CDFIs. Without it, their work addressing finance gaps and enabling ambitious businesses to innovate, create jobs and unlock regional growth will be in jeopardy.
Access to the right funding will supercharge the UK’s growing businesses, and CDFI lending could fall by £100m every year if the loan guarantee scheme is not renewed on similar terms to RLS. This would leave tens of thousands of already under-served SMEs without the finance they need. It would increase geographic, ethnic and gender-based barriers to small business finance across the UK, and hamper the transition to net-zero for those small businesses which already struggle to access finance.
A long-term guarantee scheme has an important role to play in helping businesses go for growth.
What next?
- The CBI represents 190,000 businesses and wants the UK to be the best place in the world to start and grow a business. The right finance is critical to making this happen, and The CBI works with lenders, intermediaries and stakeholders including the British Business Bank to raise awareness of options and improve access to finance.
- Responsible Finance represents Community Development Finance Institutions (CDFIs), which offer fair and affordable finance to businesses and social enterprises which are creditworthy but excluded or under-served by mainstream lenders.