Never has it been more true that cash is king. Those businesses that had cash reserves or access to finance throughout the lockdown were most ably equipped to see out the period of limited, or no, trading. And with the economy set on an uncertain course to recovery, the demand for finance to see businesses through a difficult period or fund investment and change programmes will continue. The longer the economy operates at a lower pace before hitting full speed the more businesses will exhaust their own cash reserves and look to commercial lending. So, how has the market changed as a result of COVID-19 and what opportunities are there for business borrowing?
It’s fair to say that the commercial lending market was very quiet post lockdown, with just a handful of lenders being open for business. This is not to say that businesses weren’t borrowing money – they were and in huge amounts, but most lending was happening through government schemes.
By early July, more than 53,000 businesses had accessed loans worth over £11.4bn through the Coronavirus Business Interruption Loans Scheme (CBILS) and more than one million small businesses had the accessed Bounce Back Loan Scheme (BBLS) taking loans worth nearly £31bn.
With government pressure to support its schemes and the opportunity to offer loans underwritten by the government, many lenders focused their resources on supporting CBILS and BBLS – severely limiting their ability and appetite to take on any new clients outside of these schemes. A total of 28 lenders now offer the BBLS.
For businesses too, the opportunity to access capital at zero charge for the first 12 months, with minimal underwriting and funds paid out within hours of application was far more attractive than traditional commercial borrowing.
So, post lockdown, the commercial lending landscape was a quiet one, but with CBILS due to be withdrawn on 30 September and BBLS being removed in November, demand for these schemes are tailing off.
There will, however, continue to be demand for finance from businesses. The latest SME Finance Monitor survey carried out by research company BVA BDRC reports that at the end of July, 87% of SMEs said they had been negatively impacted by COVID-19, with nearly half saying that their income was down by 50% or more – a trend that they expect to continue for the coming months.
According to the SME Finance Monitor, at the end of Q2 this year, 16% of businesses said they planned to apply for finance and 32% said they expected to be applying for finance at some point in the future.
So, can we expect lenders to meet this increased demand from businesses?
The picture is certainly looking brighter. In the last month or so a number of commercial lenders have returned to the market, providing more options for customers. As has been the case other areas of finance, these lenders have not immediately returned to the risk appetite they showed prior to COVID-19. They are taking a more cautious approach to underwriting and there has been a trend towards lower LTV lending right across the market.
This may be a reduced appetite to lend compared to pre-COVID levels, but it is still an appetite to lend and there are opportunities for businesses to raise the capital they need to take them into 2021.
There may also be other opportunities for business as a result of changes caused by the pandemic. A key theme of the lockdown and subsequent months has been the smooth transition to homeworking for millions of people across the country and this is driving speculation that when people do fully return to offices, they will not do so at the same scale as they did previously. It is unlikely that most businesses will do away with their offices entirely, but many will probably take a more conservative view on the amount of space they need and there have already been numerous stories of business giving up leases to reduce their office floorspace. With reduced demand for commercial space, this should put downward pressure on property values, and this presents an opportunity for businesses that currently rent their workspace.
Even before lockdown and the shift towards homeworking, it was generally considered that owning a commercial property was the cheaper option than renting one, and certainly one with more potential to contribute to the overall financial strength of the business. So, now with potential deals to be had, it’s an opportunity for businesses to take the leap and look at buying their office space, retail units, factory units or any commercial premises used by the business.
As a whole of market specialist debt advisor, we at Sirius Property Finance have had the benefit of dealing with the full range of lenders post lockdown, including a number of bespoke lenders. This has worked to our advantage and puts us in a great position to help clients source the finance they need to make the most of upcoming opportunities, or simply to navigate the next few months.
Going forward, I anticipate a return a more normal commercial lending environment in the next six month, although lenders will continue to operate with caution until the effects of COVID-19 diminish and specialist advice will continue to be hugely important to help businesses access the cash they need.
AUTHOR: Paul Debney, Senior Associate, Commercial Finance