This is the headline from a current Financial Times article. The thrust of the article is that HM Treasury decided, relatively late on, to increase the maximum size of the 100% guaranteed “Bounceback” loans to the smallest companies. This increase is from the £25,000 they had discussed with ‘senior bankers’ to £50,000. The FT article reports concerns amongst bankers about fraud with this higher loan limit.
But does this matter? Surprising as it may seem – there is not so much difference between a £25mn and a £50mn limit. Provided, that is, it is also accompanied by a limit expressed as a percentage of pre-crisis revenues.
If there is no limit as a percentage of turnover, then excessive lending will take place (there will be scramble for cheap loans). if there is a sensible limit (I think this should be about 5% of annual revenue, this will work for all except property companies, this point is supported by my spreadsheet analysis of the essential spending of UK companies on these webpages).
Why if there is a turnover limit does the overall limit make (relatively) little difference? Suppose there was a 5% limit on lending as a percentage of turnover. A £25,000 limit would allow loans of 5% of turnover to be given to firms with turnover up to £0.5mn. A £50,000 limit would allow loans of 5% of turnover to be given to firms with turnover up to £1mn. There are 1,598,100 companies in the UK with turnover less than £0.5mn (BEIS statistics based on VAT returns for 2019). There are only 152,595 companies with turnover between £0.5mn and £1mn and a further 161,190 companies with turnover between £1mn and £5mn (firms who are possibly finding it difficult to obtain CBILS loan with 80% guarantee and will still be interested in the 100% guaranteed bounceback loans.
So at the very most only 300,000 companies are potentially affected by the increase in loan limit, from £25,000 to £50,000. If 100,000 actually take advantage of this increased limit (not all will want to borrow, not all will take out the maximum they can) then the increased government exposure is 100,000 x 25,000 or £2.5bn. This is a significant sum but the fraud (which concerns bankers) will only be a small for these relatively large companies. It can be compared with likely borrowing needs to get through the crisis for smaller companies (under both the bounceback and CBILS schemes) of around £25bn.
We don’t yet know the details of this latest ‘bounce back’ scheme, which will not be fully revealed before its launch next week (an initial description can be found here). There may be problems — no arrangement put together in such haste can be guaranteed flawless. I do though have two substantial concerns about the scheme (not related to the maximum limit):
- There is no indication that the amount will be based on turnover. It appears that bankers are still expected to treat this like a commercial loan, assessing the accompanying business plan. Therefore dispersal will still be very slow.
- The loans are expected to be for “up to six years”. It is unclear why subsidised lending should be for a term as long as six years. Viable firms should be expected to refinance on commercial terms much earlier than this.