Non-bank lenders have called for government help with funding following fears that the new state-sponsored ‘bounce back’ loan scheme will damage competition in the market for loans to small businesses.
Small companies can apply for loans of up to £50,000 under a government scheme that launched this week to help them survive the impact of coronavirus. Loans of up to 25 per cent of their turnover are available for up to six years, at a fixed rate of 2.5 per cent. The first year’s interest and fees are paid for by the government.
Executives in the alternative lending sector fear that they will be unable to offer loans at such a low rate of interest fixed for up to six years. Deposits in low interest current accounts provide major banks with a cheap way to fund loans, whereas many non-bank lenders rely on more expensive funding from capital markets. This type of funding has ground to a halt since the start of the pandemic.
Alternative lenders have asked the Bank of England to let them access its term funding scheme, which offers lower-cost financing to the banking sector.
In a letter sent to Bank of England chief Andrew Bailey seen by the FT, the chiefs of the major alternative lenders said that the challenge was “the cost of capital required” to take part in the bounce back loans scheme.
The scheme was launched with an initial list of about ten lenders, including the UK’s biggest banks, but none of the fintech start-ups or alternative lenders that offer loans to small businesses have so far signed up.
On Tuesday, Lloyds said it alone had lent over £1bn to more than 32,000 businesses under the scheme. Unofficial estimates suggest more than £3bn was lent on the first day alone. “The chancellor wanted to prioritise speed and cheapness over competition and the volumes going out the door suggest he was right,” said one banking executive.
The level of demand has meant that some customers have reported problems trying to complete applications. Barclays said a small proportion of applicants could not be approved immediately because they needed to give more details, while NatWest apologised to some customers who experienced delays because of “massive demand”.
But almost all on the list only lend to existing customers, which has led to criticism from companies that do not bank with the bigger high street groups.
Oliver Prill, chief executive of Tide, a business banking start-up, said it had already been contacted by thousands of customers concerned about getting access to bounce back loans.
“We have a market where a lot of money has been spent to introduce competition; what this programme is at risk of doing is inadvertently reducing that by forcing people to move their [primary banking] relationship to the big banks,” Mr Prill added.
The letter to the Bank of England, which was led by Innovate Finance and signed by companies such as Funding Circle, Iwoca and Tide, said that banks and fintech lenders should have equal access to the bounce back facilities. It called for a similar scheme to the US, where the Fed offers a low rate of interest for banks to make loans.
One person involved in the discussions said: “There’s a risk this falls off the Treasury agenda because they think the problem is solved — we want to urge policymakers to take a slightly longer-term view and think about the impact on competition.”
Fintech groups make up about 30 per cent of small and medium-sized business lending, according to Innovate Finance chief Charlotte Crosswell, and fill a gap in communities that have been hit by bank branch closures.
The BoE declined to comment. The British Business Bank, which is administering the scheme, said all lenders accredited under CBILS have been invited to apply, adding it was “accelerating the onboarding of new lenders at pace to further extend the scheme’s reach”.
A Treasury spokesperson said: “All lenders are welcome to apply to be accredited to the scheme. We recognise the vital role that non-bank lenders and challenger banks play providing credit to SMEs, and are committed to promoting competition in the sector.”
Smaller lenders spent weeks lobbying to be included in an earlier rescue package, the Coronavirus Business Interruption Loan Scheme. “This is exactly what happened with CBILS and the government spent the next few weeks trying to fix it,” said one executive. “Now they’ve made the same mistake again”.