"Loan Schemes starting to deliver, but step change needed to accelerate support to distressed firms" - CBI

The CBI has outlined a comprehensive range of measures aimed at accelerating emergency support to distressed firms amid the continuing COVID crisis.

The UK Government has acted at pace to protect companies and jobs. So far around £6billion in grants from local authorities have reached small businesses. And the Job Retention Scheme started strongly on Monday, safeguarding nearly three million jobs, latest figures show.

But today’s fresh weekly CBILS data, which shows more than £2.8 billion of lending provided to 16,000 firms so far, highlights the need to accelerate the delivery of existing support. The CBI’s Industrial Trends Survey (ITS) revealed business sentiment and investment plans in the manufacturing sector worsening at record rates (since 1958), highlighting the need to re-examine what more can be done to help companies still struggling (See Notes to Editors).

With lockdown renewed and the crisis continuing, no sector has been left unaffected. Four out of five manufacturers have seen a negative impact on their domestic output. And two-thirds of firms faced cash flow difficulties, the ITS found.

Pressure on manufacturers, transportation, distribution and other retail sector suppliers is unrelenting. These firms are ineligible for grants or relief from business rates. Smaller companies cannot access CBILs as they lack evidence to pass the affordability and viability criteria. For others, high fixed costs and tight margins mean existing loans and tax deferrals aren’t enough to survive, despite help with staff costs.

The CBI recommends two steps governments should take now to get faster support to distressed firms:

• First, accelerate the delivery of CBILs to smaller firms through three actions: 

1. Develop, with lenders, a fast and simple route to loans under £25k for small businesses who may be completely new to borrowing, possibly backed by 100% government guarantee
2. Increase the government guarantee from 80% to 100% for CBILs loans up to £500k, which could improve speed of delivery though it is not a silver bullet. Allow lenders the option to provide a longer repayment schedule for loans up to this ceiling from 6 years to 10 years.
3. Streamline documentation to speed up eligibility and viability assessments, with standard templates as in Germany and Switzerland.

Second, provide all firms in England, Scotland and Wales with a three-month business rates suspension (as in Northern Ireland) and consider grant schemes to help smaller firms unable to access existing support.

Dame Carolyn Fairbairn, CBI Director-General, said:

“As the impact on businesses, livelihoods and the economy grows day by day, it’s vital to ensure help gets where it’s needed most. The current loan scheme is up, running and working for many. Now we need another big push to get money out the door faster.

“This is a race against time, and the only winning strategy is scale, speed and simplicity. Nothing should be left on the table.

“The Treasury, British Business Bank and lenders deserve huge credit for their speed and ambition so far. The millions of jobs they have saved today are vital livelihoods protected for the future.

“But with the lockdown extended there is no room to pause. The financial strain on some businesses cannot be underestimated.

“These recommendations are based on thousands of conversations with struggling firms of all sizes and aimed at helping those who have been left behind so far. A new wave of support is vital to local communities and our small and mid-sized businesses.

“Helping firms that have fallen through the cracks will protect jobs and livelihoods as the crisis unfolds and ensure a solid foundation to build on. It is far more cost effective to stop businesses collapsing now than create jobs in the future.

“The greater the number of companies helped to survive, the sooner the UK economy can restart and revive.”

23 April 2020

Notes to Editors

CBI Industrial Trends Survey can be found here. 

Policy detail

Three-month business rate suspension 

• Introduce a 3-month business rates suspension for all businesses in England, Scotland and Wales regardless of sector or size. This should then be kept under review and the Government should consider extending this to 6 months if the situation gets worse (this suspension should include the central and local rating lists).
• A similar 3-month scheme is already being applied in Northern Ireland.
• The total cost of this suspension would be around £7.9bn, including the previously announced relief for retail, leisure and hospitality businesses, or approximately an additional cost of £5.5bn based on the distribution of rateable value across sectors [NB - ENGLAND ONLY COSTS]. Barnett consequentials to be applied and distributed to devolved governments.

Fast-track CBILs by extending loan guarantees alongside further process improvements

• Work with industry at speed to provide a simple solution to approve loans under £25,000 for small businesses around the UK to support our high streets, manufacturers and entrepreneurs, possibly backed by a 100% government guarantee.
• An extension of government guarantees for the SME loan scheme under £500k from 80% to 100%, which could improve speed of delivery but is not a silver bullet.      
• Process improvements to make loans under £500k more affordable to medium-sized businesses in distressed sectors, including allowing repayment terms to be extended from 6 to 10 years for some firms, to help them pass bank affordability assessments.
• Streamline documentation to speed up eligibility and viability assessments, with standard template documentation as in Germany and Switzerland.

Extension of grants to businesses in greatest distress 

The easiest and quickest way to get extra grant support to businesses is through the current system which uses the business rates process to disseminate funds. Other delivery mechanisms, such as using HMRC, could link grant support to affected income but may take time to set up. As business rates policy is devolved, the existing grants available differ slightly across the devolved nations. Therefore, the policy solution is slightly different for each nation.

England

Consider extending the two existing schemes in England to capture all businesses that fall within the eligible rateable value brackets. Based on the latest data, this would capture 90% of properties and 28% of the tax base. Indicative costing based on the distribution of properties and rateable value as per the local ratings list suggests this could cost around £10bn. This involves the following two policy changes:

• Extend the Small Business Grant Fund (SBGF) to all properties with a rateable value below £15,000, so that these businesses receive a £10,000 grant.
• Extend the Retail, Hospitality and Leisure Grant (RHLG) to all businesses with a rateable value between £15,001 and £51,000 regardless of sector, so that these businesses receive a £25,000 grant.

Options also need to be considered for medium sized businesses with larger properties (up to £99,999 rateable value), but some qualifying criteria would be needed to target the support at the most distressed. Properties with a rateable value between £51,001 and £99,999 represent a further 5% of properties and 11% of the total tax base. As with the current scheme the value of the grant could be determined by the average rateable value of the property which is £70,000 for this bracket. The cost of this extension would depend on how businesses could be targeted through the qualifying criteria.

Scotland

Some potential options to consider with regard to extending existing grants programmes to support Scottish firms:

• Consider extending the Retail, Hospitality, Leisure Support Grant to all businesses with a rateable value between £18,000 and £51,000 so that these businesses receive a £25,000 grant. Alongside a potential extension of the Small Business Support Grant to provide all properties with a rateable value below £18,000 with a £10,00 grant.
• As with England, options also need to be considered for medium sized businesses in Scotland with larger properties (up to £99,999 rateable value), but some qualifying criteria would be needed to target the support at the most distressed. This could consider extending the Retail, Hospitality, Leisure Support Grant further to add an additional rateable value bracket to the eligibility criteria. As with England, this could include extending the grant scheme to include properties with a rateable value between £51,001 and £99,999. The cost of this extension would depend on how businesses could be targeted through the qualifying criteria.

Wales and Northern Ireland

Any changes to grants schemes in other areas of the UK should see Barnett consequentials applied and distributed to the Welsh Government and Northern Ireland Executive to further support local businesses.

Examples of firms in distress currently unable to access loans:

• A regional ferry operator with around 2,500 employees. The operator has been hit by a heavy drop in its passenger traffic which accounts for around 70% of its revenues. However, it is still operating a reduced service due to the strategic importance of its freight operation for supplies to UK plc. The operator is running these lines at a loss and without immediate government support to break-even on these routes will be forced to close their remaining operations, significantly damaging the supply chain of essential food products, materials for the NHS, and other manufactured goods needed during the crisis. This company’s position is typical of the wider Roll-on Roll-off (RORO) industry. Over half of freight arrivals in UK ports depend upon RORO.
• A hotel chain with over 400 employees, is struggling to cover their costs, despite the 100% business rates relief. A hotel with 15 rooms, a restaurant and bar with a rateable value of £73,000 falls outside of the current grant scheme. Stripping out the restaurant and bar would result in a rateable value below the £51,000 threshold and would therefore be eligible for the grant. This business is struggling to access other forms of funding available and are also unlikely to take up the furlough scheme as they currently do not have the cash in the bank to meet the payroll.
• One medium sized plant nursery with around 40 employees supplies bedding and pit plants to retailers and garden centres in the UK. March to June normally represents the busiest time of year for sales (75% turnover in this period). They now face having no sales due to closures of retailers they usually supply. The plants are very seasonal, perishable if not looked after and short lived in term of sales period so they cannot apply for the CJRS. They have no option to borrow money or take on extra debt to cover the loss as the margins they operate are too tight. So overheads remain the same; no borrowing capacity and potentially millions of pounds of waste as long as the Government’s guidance remain in place.

• A specialist automation firm which has seen a dramatic drop off in sales was rejected for a CBIL by their existing lender based on the affordability criteria. This is despite their management accounts to the end of Feb 2020 showing a sizeable profit for the year. Their monthly fixed overheads are £50k and they applied for a loan to cover these costs for 6 months. If they can get a loan, they will be able to weather this period and continue to provide services to their customers, including the MoD.
• UK swimwear and swim equipment brand that is sold across the UK and overseas and employs around 50 people. Sales have collapsed to virtually zero while every pool in the UK is closed. If there are no sales in the next 3 months, the business will run out of cash by the end of June. Despite 15 years of profitability and a requirement to borrow money only as a result of Coronavirus, they have been turned down for CBIL. The lender claimed that looking forward to 2021 when the loan would start to be repaid and over a 6 year period they are not confident the business would be able to service that debt along with the existing level of debt, which is with that same lender. They have already furloughed 80% of their staff as part of the CJRS, but this only marginally helps their position. They have also delayed all payments to UK and overseas suppliers by three months and delayed all orders for stock by at least 3 months. Additionally, they are delaying and cancelling all future seasonal launches and have mothballed their operations in Hong Kong and Australia.