Government should build on the success of coronavirus bounce-back loans to help many more businesses

The effectiveness of the new scheme highlights the slowness of the government's original plan to support businesses. Ben Chapman considers what can be done to reform the CBILS

The chancellor, Rishi Sunak (PA)

The government's "bounce-back" scheme, which rapidly grants loans of up to £50,000 to businesses affected by coronavirus, has proved to be a tremendous success, with small firms receiving 69,000 emergency loans worth in excess of £2bn in its first 24 hours of operation.

Most of the money was in firms' accounts within a day of filling out a short application. For that, the government and banks should be applauded.

However, the bounce-back loan scheme's very success has also served to highlight the major deficiencies in the government's other main effort to lend money to small and medium-sized businesses - the less-than snappily named Coronavirus Business Interruption Loan Scheme (CBILS).

Seven weeks ago, the chancellor hailed CBILS as part of £330bn of government loan guarantees for businesses large and small to provide them emergency funding through the coronavirus crisis.

So far, just £4.1bn of loans have been approved under CBILS. At the current rate it would take years to get all of the money out of the door. Not exactly the emergency measure the Treasury had promised.

The government has attempted to shift the blame onto the banks but the the real problems lay in the scheme's design. They must be fixed quickly to save thousands of good businesses from collapsing through no fault of their own.

Bounce-back loans have been taken up so quickly because the government provides a 100 per cent guarantee and the paperwork required is minimal.

CBILS, by contrast, requires mountains of forms and a sizeable audit trail because banks still need to carry out their normal checks into whether a company is creditworthy, and viable.

This may sound justified, given that the amounts involved are much larger. Loans can be up to £5m per company. But it means the scheme simply isn't working.

It's based on an existing scheme - the Enterprise Finance Guarantee - which has been around for more than a decade. In that time, the amount lent under EFG is only a tiny fraction of the tens of billions that the Treasury now thinks businesses need to access within weeks. So it was perhaps a strange choice of system to model CBILS on.

Under CBILS, loans are 80 per cent backed by the government, which is a lot but it means banks are on the hook for potentially billions of pounds of losses if companies fail.

Now, banks are not entirely blameless here. Since the financial crisis they have shown little appetite for lending to small businesses but they have a legitimate argument that they cannot lend money to companies when they are far from confident that those companies will survive.

So how must the scheme be fixed? Paul Yacoubian, managing director at Craig Capital, who has advised businesses on applying for CBILS, says the current system is like providing a tractor when a Formula One car is required.

He suggests the government should give a 100 per cent guarantee on loans up to £500,000. The paperwork could be reduced drastically and businesses self-certify that much of the information they provide when they apply is correct.

To deter potential abuse of the system, hefty criminal penalties could be imposed for incorrect information given by directors. This approach has been taken in some other countries.

The question is whether the amount of abuse of the system, and the amount of bad loans given to failing companies, outweighs the financial cost of the alternative: letting good companies fail because they could not access capital they needed.

Most analysts seem to think the Treasury has been too cautious in this regard. Money needs to get out the door quickly and problems should be mopped up later.

What is clear is that reform of CBILS is needed quickly. By introducing bounce back loans, the government has shown it is willing to be flexible as the crisis unfolds. A little more flexibility would be hugely welcomed by many British firms and could keep them afloat just long enough to whether the Covid-19 economic storm.