As we started 2020, it felt like the peak of an economic cycle. The UK economy had enjoyed a decade of consistent growth and the Global Financial Crisis was an increasingly distant memory.
For businesses, this meant loans were plentiful.
The benign times had given birth to a thriving new sector of innovative business lenders, ranging from digital providers able to deliver cash in minutes on your iPhone, through to new challenger banks that brought Captain Mainwaring to your doorstep holding an iPad.
Then coronavirus (COVID-19) struck the UK, and more change happened to the business lending market in three months than normally happens in three years.
As in so many areas of our lives, the impact of coronavirus on lending was unprecedented.
A coronavirus rollercoaster
As the coronavirus lockdown hit, lending to businesses froze up.
Many finance providers had no choice but to shut their doors to new customers, as their own sources of funding dried up.
Even those lenders with access to stable funds had their attention taken up by the struggles of existing business customers.
The government tried to calm nerves with an announcement of £330bn of loan guarantees to ensure that lending remained available to UK firms.
HM Treasury’s flagship initiative was the Coronavirus Business Interruption Loan Scheme (CBILS), modelled on a little-used government lending scheme called the Enterprise Finance Guarantee.
However, action proved a lot harder than words, and a month later – with just a few thousand firms helped by CBILS – intense pressure to do more led to the Bounce Back Loan Scheme (BBLS).
If the launch of CBILS was a trickle, then BBLS was a flood.
With few questions asked, struggling firms could get a BBLS loan from their bank. More than a million BBLS loans have already been granted, equating to years of normal lending volumes in just a few months.
With BBLS and CBILS due to close at the end of November 2020, it’s time to start thinking about what lending to businesses will look like when the government money runs out.
A tale of two firms
Coronavirus has not impacted all businesses equally.
On the one hand, BBLS and CBILS are aimed squarely at UK firms disrupted by coronavirus, where hundreds of thousands of shops, pubs and restaurants spring immediately to mind.
After coronavirus, those firms will work to re-establish their past trading levels, while burdened by new BBLS and CBILS debt.
Sadly, it now seems inevitable that many will not recover sufficiently, and will be forced to close as the debt burden proves too high.
However, many businesses have actually thrived under coronavirus. Swathes of the ecommerce, healthcare or manufacturing sectors, for example, have done well.
Indeed, many firms in badly affected sectors have actually prospered during coronavirus.
My own local cafe, for example, carried out food deliveries during the lockdown. Many of these firms will continue to grow as the economy recovers, so we can also expect demand for growth finance to soar.
Data, data, data
As the UK economy has shifted away from traditional industries, fewer and fewer businesses have physical assets such as premises, vehicles or machinery.
This matters to finance providers, because these physical assets can be used as security against a loan, meaning they can be sold if a business cannot repay its debts.
This has made it increasingly important for lenders to understand the underlying performance of each business when granting and monitoring loans.
In the old days, this might have meant reviewing copies of financial statements. But these days, it can be done far more efficiently and effectively by getting business performance data at source.
One notable new technology is Open Banking, enabling firms to quickly and securely give lenders read-only access to their bank account.
Equally, the rapid emergence of cloud accounting has made it much easier to share your detailed financial performance data with lenders, as the data is securely held in the cloud.
In the run-up to coronavirus, these new technologies of Open Banking and cloud accounting were just beginning to get a foothold in business lending.
After coronavirus, expect them to become the standard way of doing things, as lending to businesses becomes riskier, and business loans become more scarce.
Out with the old
If traditional high street banks were the pantomime villains of the Global Financial Crisis a decade ago, then they have been the unsung heroes of coronavirus.
Often derided as outdated dinosaurs, it was these traditional banks – with their huge resources – that have been the backbone of delivering BBLS loans to more than a million UK firms.
Like many near-term emergency measures, BBLS will have a long-term price.
Many of the firms that have taken a BBLS loan may struggle to pay it back, and banks will need to handle these challenged firms with a robust but sympathetic collections process.
This will drain their resources and distract their focus, making it harder for traditional banks to focus on new lending.
The UK will need a next generation of alternative lenders to fill the gap. More than ever, we’ll need new challenger banks focused on lending to UK businesses.
These challenger banks will come in a range of shapes and sizes, ranging from digital banks on your mobile such as Starling Bank, through to the next generation of traditional banking relationships such as Allica Bank.
How to boost your chances of getting business funding
To help you increase the possibility of your business getting the funding you need both now and in the future, here are three things to consider.
1. Take the time to get to know new finance providers
Firstly, recognise that coronavirus has fundamentally changed the landscape of business loan providers.
Just as the pandemic had a profound impact on many small businesses, it’s also profoundly impacted many business lenders, and it’s quite possible that funders you’ve previously worked with will be a shadow of their former selves.
This means that if you receive a “no” from lenders that you’ve dealt with in the past, you shouldn’t assume it will be a no from every lender you speak to.
To succeed, you need to be willing to invest time in getting to know new finance providers.
2. Consider expert advice to navigate the many financial products on offer
Secondly, the types of business finance products that are readily available are likely to change as result of coronavirus.
Loans secured on assets – such as your business premises, equipment or vehicles – tend to hold up well in challenging economic times, because they are safer for lenders.
There are also products to finance your cash flow that tend to hold up well in difficult times.
For businesses that trade on credit, invoice factoring is a relatively stable way to release the cash tied up in your outstanding invoices.
For businesses that receive card payments, cash advances can be repaid directly through your payment provider.
In fact, there are dozens of specialist business finance products, which means you should consider expert advice to navigate your funding options.
Your accountant may specialise in advising on business lending. But if not, they should be able to recommend a trustworthy adviser.
3. Make sure you have robust data to show your business is viable
Finally, in challenging periods such as these, lenders are going to want to get under the skin of your business.
This means you’ll need to have robust data to demonstrate that your business is viable.
Lenders may ask you to give them clear visibility on your underlying financial performance, such as through access to your accounting software or business bank account.
This may feel intrusive, but do remember that lenders aren’t just trying to find reasons to not to lend to you. They’re also looking for reasons to lend to you.
Maximise your chances of getting funding by staying on top of your numbers. And if you’re not great at financial management, don’t be ashamed to seek the help of an accountant.
When coronavirus has receded, it’s likely to be harder for businesses to get funding than before. You can’t change that, but you can put your best foot forward when seeking a loan.
This means having robust data to demonstrate that your business is viable, being willing to look beyond traditional sources of finance, and taking the time to search the market.