Our blog yesterday has generated a lot of discussion. Something we’ve been asked is why the old scheme failed so badly, and do we think the improved scheme will perform any better. Here is our opinion on this.
Why did the original Business Finance Guarantee (“BFG”) scheme fail so badly?
There is no simple answer to this question, but it largely comes down to the narrow design of the scheme and customers appetite for debt. Here are some of the themes we saw come through in the past few months.
- The original scheme was effectively limited to emergency working capital funding for small to medium businesses that were adversely affected by COVID-19 but could reasonably be expected to survive. This created a limited base that was incredibly difficult to bring within normal lending criteria.
- Talking to our banking connections, common feedback was that they fielded a huge number of enquiries about the scheme, but 90%+ of those enquiries progressed no further when the customers realised that the loans would be secured. Customers assumed that the Government was guaranteeing the borrowers obligations. Of course, the Government was guaranteeing 80% of the bank’s position which, at least in theory, allowed the banks to take more risk in making the lending. The reality was that the loans being underwritten did not
allow the banks to take more risk, but it did, however, let the banks provide finance at an unprecedently low rate for business debt.
- Businesses who could have qualified under the old BFG scheme were in “survival mode” and were looking to decrease debt, not take on additional secured debt. Many of these customers wanted to use the scheme to refinance existing working capital facilities to take advantage of lower interest rates, but this was not possible.
- Back in May & June, we fielded many queries from more confident businesses who were aware of the low-interest rates under the BFG scheme and wanted to use the loans to acquire plant and equipment. That, of course, was not allowed under the original scheme.
- Feedback we have received is that the application and credit processes for the banks were incredibly onerous. In the end the major banks seemed to have become completely frustrated by the process and stopped actively promoting the scheme. In fact, it would not
be unfair to say, that many of the banks were completely cold on the scheme and would push back on any enquiries to use it.
We have heard through the grapevine that a significant portion (perhaps even a majority) of the 780 loans written under the old scheme were written by one of the smallest registered banks.
Will the BFG scheme be better this time around?
We understand that the banks campaigned for these changes, and early signs are positive that the updated scheme will help keep finance flowing to businesses.
We were given a heads up of the changes by one of the major banks a few hours before the announcement yesterday. That bank had been particularly “cold” on the original scheme, but they have told us that they are planning on pro-actively contacting their business customers in the next couple of weeks now that the scheme has been relaxed.
Further, the scheme has fundamentally changed from providing emergency lending to businesses in survival mode to lending to businesses looking to recover from COVID-19 or reposition themselves due to changes forced by COVID-19. Also, the amount that can be borrowed has increased ten-fold, and the funds can be used for general business purposes and capital expenditure. This moves the scheme into an entirely different segment of the market. The banks are in a stronger position to support this segment of the market.
While many businesses will still be looking to pay down their debt, we expect that there will be others who will want to take the opportunity to invest in plant at interest rates that we will unlikely ever see again.
All things considered, we expect that the updated scheme will be more successful than the original. Of course, it couldn’t really perform worse could it? Ultimately, how much is borrowed will come down to the risk appetite of businesses and whether the banks can get the deals done. However, we expect that there will be many businesses out there who look to turn the COVID-19 crisis into an opportunity, and the changes to the BFG scheme may help them.