Of all the milestones chalked up in the 12 months since the first wave of the pandemic hit the UK, it is one of the less heralded, but no less remarkable; 100,000 British firms have applied for, and received, a Coronavirus Business Interruption Loan (CBIL). As both CBILS and Bounce Back Loans come to an end, Terry Burke, senior business development manager at surveyors Naismiths considers what the future holds.
In the past year, lenders have provided more than £23 billion in finance under the government-backed CBIL scheme, a vast collective effort that has kept thousands of struggling firms afloat and saved countless jobs.
With a further £46.5bn lent to more than 1.5 million small firms through the Bounce Back Loan (BBL) scheme, the finance industry – coupled with Government support – has stepped up admirably during one of the country’s darkest hours.
With both CBILs and BBLs offering attractive terms to borrowers – including no interest or fees for the first 12 months – they have frequently been the first choice for firms hit by the impact of the pandemic.
But with both schemes ending on March 31st, borrower demand is likely to switch to other loan types. Asset finance in particular is set to see a spike in demand, for two reasons.
The first is asset-based lenders’ long-standing reputation for speed and flexibility. With invoice finance providers often able to deliver funds within days of an application – compared to the weeks or even months required for a conventional bank loan – it is widely seen as a go-to source of working capital or cashflow support.
The second is the arrival of the Recovery Loan Scheme, the successor to the CBIL and BBIL Schemes. Due to launch on April 6 and run until the end of 2021, the new scheme resembles its forebears in that the government will guarantee 80% of the finance provided.
Crucially, the scheme will also be open to asset finance and invoice finance providers. They will be able to offer facilities of between £1,000 and £10 million to qualifying businesses, safe in the knowledge that 80% of the risk will be shouldered by the Treasury.
Demand plus risk appetite – a recipe for success or trouble?
While the full details of the Recovery Loan Scheme have yet to be announced, many ABLs will be licking their lips at the simultaneous prospect of strong borrower demand and Treasury loan guarantees.
For much of the past year, the economic uncertainty unleashed by COVID-19 prompted many ABLs to retrench. This has been especially true in the construction sector, in which building contractors often use asset finance to spread the cost of expensive plant and machinery.
Even though building sites were allowed to reopen fairly soon after the total shutdown imposed at the start of the pandemic, construction’s heavy reliance on wider business sentiment has long made it prone to boom and bust.
That volatility has taken a grim toll during the pandemic. Construction industry output plummeted by 12.5% in 2020 – the worst figure since the 2009 crash – leading more than 2000 building firms to go bust in England and Wales alone.
Construction’s insolvency rate in 2020 was a full 20% higher than that of the industry with the second worst failure rate. Unsurprisingly, many ABLs have been wary of all but the most vanilla construction sector borrowers, and overall lending volumes have stayed modest.
But the arrival of the Recovery Loan Scheme could now see lenders recalibrate their attitude to risk. Those who built up capital reserves over the past year may now be tempted to go on a lending spree.
But even with the benefit of the Government’s 80% guarantee, correctly gauging the risk profile of construction sector borrowers is fraught with difficulty.
Firm foundations or foundering – how to credit score construction firms correctly
The construction sector is typically underpinned by a long and complex supply chain, in which the end customer sits atop a tree that includes a main contractor and multiple specialist subcontractors, as well external experts such as architects, surveyors and project managers.
That interdependence, coupled with the long timeframes involved, means a lender carrying out due diligence on an individual construction firm must factor in the resilience of the wider supply chain.
A number of those supply chains are set to see bitter contractual disputes in the coming months, as arguments about who should bear the liability for cost or time overruns caused by the pandemic break into the open.
Identifying whether a contractor is at risk of being sucked into a costly legal dispute, and understanding the distribution of risk across the supply chain, is vital for an ABL considering a loan application. This is a complex area and ABLs keen to lend to construction sector businesses should seek expert help.
Loan applications must also demand full transparency from would-be construction sector borrowers. Liabilities for any existing CBIL or BBIL borrowing should be declared, as well as any outstanding Crown Debt (e.g. deferred VAT payments).
These liabilities may not show up on current profit and loss statements, as no repayments were due on CBILs and BBLs for the first 12 months after the loan was taken out. Nevertheless they could seriously impact the borrower’s ability to repay any additional debt.
Care should also be taken with VAT exposure. UK businesses as a whole racked up £33.5bn of VAT liabilities in 2020 after the Government enabled them to defer VAT payments due in the three months after the first lockdown was declared. Construction sector firms face an extra issue in that the VAT rules for their industry were overhauled at the start of March.
Loan applicants should therefore be required to declare the full picture of their future tax and debt liability, as well as any significant unpaid invoices or disputes they may have pending.
Build build build
After a tough 12 months, the construction industry is poised for a strong return to growth. As business sentiment improves with the easing of lockdown restrictions, residential builders in particular are seeing orders soar.
Not for nothing has the Prime Minister urged the sector to “build build build” the wider economy back to recovery.
The Recovery Loans Scheme offers the asset finance sector a chance to play a vital role in powering that growth. And while the expected surge in demand for asset finance from construction sector firms offers ABLs a compelling opportunity, the nature of the construction industry brings credit risk too.
Responsible asset finance providers should grab the opportunity but be mindful of the risk, and seek expert advice where necessary to quantify and manage it.
* Terry Burke (pictured) is senior business development manager at UK national surveyors Naismiths.