The government’s initial emergency capital kept many businesses afloat. But we are past survival mode, argues a director at Conister Bank, which has been at the forefront of loan-support to SMEs during the worst of the crisis. In this commentary, he examines where some hard recovery decisions need to be made by investors and the UK government.

This commentary from Douglas Grant, director of the wholesale lending and broker division at Isle of Man-based Conister Bank, considers what investors and the government must do to lead a strong UK business recovery. Conister took part in the initial UK government business support schemes, allocating tens of millions to small and medium-sized businesses (SMEs) to weather the crisis. But Grant (pictured) argues that what is now needed is a tough and discerning recovery plan that doesn't keep unsustainable businesses alive. "It is imperative that we identify, prioritise and protect our most resilient individual business sectors and segments, and we must avoid amplifying the zombie status of many UK SMEs, living off an ever-increasing debt pile, at all costs," he writes. We welcome outside commentary, where the usual editorial disclaimers apply, and invite readers to respond. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com.

With many businesses being forced to pause trading during lockdowns, SMEs with limited capital buffers were facing liquidity pressures in a period of great uncertainty as the first wave of COVID-19 swept across the UK. Rightfully, in our opinion, the government stepped in and acted quickly and decisively to provide funding to these businesses through the emergency loan schemes set up by the British Business Bank. The Bounce Back Loans Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS) have provided a lifeline to many businesses, playing instrumental roles in keeping many resilient SMEs alive during this uncertain year.

However, as with any system set up as an emergency response, especially one set up to get cash out of the door to businesses quickly, it has not been without its issues. As an alternative lender specialising in the SME market, Conister received an initial allocation limit of £10 million for the BBLS scheme and received 4,607 applications with a total amount of £162.7 million; most of this was within 72 hours of going live. Without doubt, the scale of applications was enormous, so we applied for and received an additional allocation of £5 million for the CBILS scheme and so far we have lent £19.7 million. I expect we will fulfil our allocation £25 million for the CBILS and BBLS schemes this month.

While demand has exceeded supply, the schemes have acted as important triage systems to identify and support viable businesses that need credit the most and, in doing so, provide a boost to the health of the UK SME segment as a whole. However, we are now past this triage phase where the collective terms ‘small business’ or ‘SME’ were used to gauge the impact of the pandemic on the economy, and these are now unhelpful. It is imperative that we identify, prioritise and protect our most resilient individual business sectors and segments, and we must avoid amplifying the zombie status of many of UK SMEs, living off an ever-increasing debt pile, at all costs.

Recently, the Resolution Foundation warned that the structure of the Bounce Back Loan Scheme – which allows small businesses to borrow money equivalent to three months’ sales, up to £50,000 – gave banks an incentive to keep alive firms with weak long-term prospects, confirming our view all along. The full impact of this is yet to be realised and could be compounded once the effects of Brexit trickle down into the economy. We are yet to fully realise this as the impact of the pandemic has been so much greater but we would do well to remember that the long-term future of the UK’s business sector is fundamentally reliant on people and resilience. Business has always been about people buying from people.

We must ensure that, principally, the financial security of individuals is protected so that they can continue to conduct business with each other. While the BBLS has achieved this, and businesses across the country have shown extraordinary levels of adaptability and strength in the face of changing consumer behaviour, we must also appreciate that we are now beyond the survival stage. A great many businesses will not survive this pandemic and we must learn from each failure.

For us it was crucial that priority was given to resilient businesses to allow them to pivot their business models for the new normal. It was for this reason that we chose to increase our allocation for the CBILS, as this scheme allowed us to underwrite the loans to businesses ourselves, giving us the opportunity to really take a look under the bonnet and identify those resilient SMEs that have already shown extraordinary levels of adaptability and strength in the face of an ever-changing landscape.
 
However, there still needs to be a continued tripartite level of sustainable support from government, alternative and traditional lenders working together, to identify and protect the more resilient sectors of the economy and ensuring their existence is guaranteed. After vital financial aid, the combination of continually depressed interest rates combined with lockdowns leading to consumers having higher than expected savings for this stage of the economic cycle has created a unique environment where lenders are flush with liquidity in a low-yield environment. As lenders prepare for the potential of negative interest rates, they will look to deploy liquidity to improve their income statements which in turn will provide support to resilient business sectors.
 
In the current scenario, many investors are sitting on cash piles that are not appreciating in value while agile companies, which continue to survive and, in some cases, thrive by providing a product or service which has a genuine medium to long-term solution to a recognised problem, require capital to continue to develop and grow. We appear to be in a state of limbo where businesses need support with widespread and long-term growth initiatives that allow them to flourish, while banks and lenders are looking out for any directive on which sectors remain a government priority to provide the liquidity to allow this.
 
The government’s initial decisive action was key in providing the emergency capital that kept many strong businesses afloat and that same level of decisiveness is needed now to encourage lenders to deploy the high levels of capital to robust businesses operating in sectors that ultimately can grow stronger, with the right funding – uncoiling the spring and kickstarting the economy as we emerge out of the other side of the pandemic.
 
At Conister we truly believe that resilient sectors of the economy will emerge from this crisis and that SMEs will return more resilient and stable than ever before. We are determined and absolutely focused on working with companies to protect those sectors and we will continue to do all we can, working alongside government and traditional lenders, to support British businesses.

About the author
Douglas Grant is director of Conister Finance & Leasing Ltd, the wholesale lending and broker division of Conister Bank Limited, an independent bank based in the Isle of Man established in 1935. Conister has been operating in the UK for over 20 years and lends to small and medium sized businesses to provide structured and bespoke wholesale funding solutions across a breadth of sectors. Douglas has over 30 years’ experience of working in finance, initially with Scottish Power, before moving to the industrial sector to work with ICI and then Allenwest. Prior to joining Manx Financial Group, he was the financial director of various UK and Isle of Man private sector companies and has extensive capital markets' experience. He is a Chartered Banker, a member of CIBS and a MBA.