CBILS, the UK Coronavirus Business Interruption Loan Scheme, has apparently now approved loans to 12,000 small firms with turnover of less than £45mn. A total of close to £2bn has been loaned out in total, around £160,000 per firm
These are the figures given by Chancellor Rishi Sunak at the government press briefing yesterday
Two problems though.
Problem 1 The first, most obvious, is that as yet far too few firms have been able to access this borrowing so far, to cover their essential costs. The analysis I conducted for my NIESR paper suggests that at least 200,000 small firms, perhaps 400,000 or more, will need to borrow from this facility. We have not yet met even 5% of the need.
Where do I get these numbers from? There are 1.9 million companies in the UK with turnover of less than £45mn (I am here excluding non-profits, partnerships and sole proprietor businesses, because these do not qualify for this scheme). The vast majority with turnover of less than £1mn. At least a third upwards of 600,000 have suffered a near total collapse of revenues because of the lockdown. Some of these those without commitments (e.g. rent, debt servicing, maintainance of property and equipment) or with substantial cash reserves do not need to borrow in order to survive. But a large proportion, survey evidence suggests at least one third, are running out of cash.
Worse still , there is nothing in the CBILS scheme to ensure it is targeted on those firms in greatest difficulty — any firm is eligible, not just those that have suffered large losses of turnover.
Sunak sees no reason to raise the guarantee from 80% to 100%. The performance of the scheme says otherwise. After 2 weeks in operation, the scheme has only managed to deliver funds to less than 1 in 20 of the firms who need help. A switch to 100% is needed to get the money quickly out the door.
Problem 2 The average loan size of £160,000 is substantially more than required to help most firms. The vast majority — 1.8 million of the 1.9 million small companies in the UK — have revenue of less than £1 million. By my calculations the average loan needed to keep a £1 million revenue businesses that has lost all revenue alive for 6 months is only £40,000 (after taking account of the additional support given by the furlough scheme). Many businesses have lost revenue but not as much as this and need even less support.
I can think of two reasons why the average loan size given so far is so large
- it is quite likely that a relatively high proportion of small businesses with turnover in the £1mn-£45mn range have sucessfully applied for the CBILS loan. In which case the average size should come down over time
- more concerning is the possibility that the loans are simply too generous. Small businesses can get money twice (through the furlough scheme and through CBILS). Even if they are not claiming twice over, they may be getting more money that they really need to survive the lock down.
As I argue (see my practical scheme for details) this problem of poor targeting can easily be corrected. The loans on offer should have been based on revenue loss — more money to firms in greatest difficulty — and focused on a reasonable estimate of essential costs.
Moreover, such targeting removes the key objection to 100% government guarantees. If the money really is essential and would have to be transformed to grants to keep firms alive, then there is very little credit risk for the taxpayer providing a 100% rather than 80% guarantee.