Two important announcements this week,
- The ability for surveyors to value property
- Economic Secretary John Glens announcement of a re-insurance scheme for credit insurance is the unlocking of traditional lending beyond the government schemes.
For those joining the various Capitalise live sessions, you will have heard much discussion about the immediate freeze on lending during lockdown, the (weekly) evolution of the government initiatives such as CBILS, BBLS, as well as how lending products will start to manifest a return to the market in the year ahead.
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As we move out of crisis into recovery mode, we can consider the different types of lending, (unsecured, invoice, trade, asset, merchant cash advance, and secured) and start to plot when, and how, these products will help rebuild SME cash flow in the second half of 2020. Lets look deeper at each product.
Outside of CBILS/BBLS is currently available only for businesses that have been active and successfully trading through the crisis. Without positive EBITDA to support the loan, lenders are unable to underwrite successfully. We will need several quarters of trading before the unsecured lenders resume their pre-covid lending. It is telling that key alternative lenders such as Funding Circle, Market Finance, Fleximize have all pivoted to CBIL lending only for their loan products, for the current period.
As outlined in our webinar with Market Finance and Optimum Finance will have a huge role to play in the second half of the year. Why not now? Well with sales ledgers decimated, the amount of cash available through the ledger has been falling. BUT… as trading picks up and the ledgers grow, this will be a key product and one of the easiest assets (invoices) to leverage. Credit insurance or the potential absence of it was starting to become a worry, but with the announcement from the Economic Secretary John Glen (on the 13th May) that the government will backstop Credit insurance through a reinsurance program, those concerns have abated. In 2018, over £350billion in business on credit terms was insured. So, the backstop is there for Invoice finance to play its pivotal role in the months to come. This is a hugely welcome outcome and we should lean on this product heavily.
With £200 billion of lending into the commercial property market the importance of property lending is clear. In lockdown, surveyors have been unable to visit properties and therefore unable to provide the valuations required to facilitate the underwriting of the lend. Zoopla estimates that £80 billion of residential transactions have frozen as a result of the lockdown, with the same impact occurring in commercial lending. With the announcement from the department for business, energy and industrial strategy allowing surveyors to visit properties, commercial mortgages, bridging, development loans and secured lending will all open up again. 45% of commercial property in the UK is owned outright. With no lending, or indeed low to medium LTVs, properties will provide the lowest rates of borrowing available in the market. With so many products available - this will release much needed cheap capital to UK SMEs.
The lenders have continued to lend through the crisis, but at a much-reduced rate, mostly a demand-side issue rather than lender supply as businesses by and large just haven’t been looking to buy new assets. They have been defending their balance sheets, not growing them. With 1/3 of business equipment investment in the UK funded by asset finance, as the appetite for new assets return, lenders will be there, the timeline here is less dependent on the lenders, but more on the appetite of UK SMEs to buy new assets.
Traditional MCA is a high street lending product, funded through the merchants’ EPOS terminal for shops, restaurants, hotels and more. Of course, with no footfall, takings are close to zero and therefore MCA lending has cratered. The lenders will have also taken a hit as they are paid back on every transaction through the machines, so their repayment profiles have been affected dramatically. They are however still making offers based on the merchants 12months statements, but will only release funds once the terminals are resuming activity i.e. footfall returns (and their existing repayment profiles resume). The timeline, therefore, is predicated by merchants opening, perhaps stage 3 of Boris’ roadmap. As in every large transition, the move from high street to e-commerce whilst it has been a 10yr story has seen a dramatic shift during COVID, so for the E-commerce sellers, these lenders have been open and indeed the size of the lends has been healthy.
Whilst lending isn’t the solution for all businesses, there are green shoots in the lending markets. As with every crisis, there are phases. We have been through the liquidity freeze. We have seen the government support develop and take hold, now with the announcements today regarding surveyors and re-insurance we see the opening up of more traditional lending of property and invoice finance. As the roadmap progresses, as people return to the shops and businesses require new assets more lenders will return with cashflow liquidity with MCA and asset finance and as this time passes, so too will unsecured lending return for those that have been unable to access what they require from the government schemes.
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