A Letter to the Chancellor
Dear Mr. Sunak,
I hope you are well and staying safe and I hope you are having an amazing 40th birthday.
Dear Chancellor,
I hope you are well and staying safe and I hope you are having an amazing 40th birthday.
Firstly I want to say a big well done, not only to you but to everyone in parliament for remaining strong, fearless and courageous in such a turbulent time. The confidence, zeal and fight you’ve shown, in particularly when providing us your economic plans are truly uplifting and befitting considering the negative dark times we are in due to this devilish pandemic.
Your approach thus far to tackling the problems presented by COVID-19 have been swift, timely and right, as the world bank suggested and last week’s bounce back loan results displayed. Over £2bn in loans in less than five days — I can only but hope that our nation’s banks continue to keep this up as we slowly move into a phase of recovery as a national and global economy.
When I first got the news about the BBLs, like many others, I was apprehensive and unsure if it would work. Less due to the Treasury’s ability to execute and more due to my knowledge of the operational and cultural issues many of the BBLs providers have. It’s due to this insight that I was pushed to compose this letter. To get clarity on some of the grey areas which could cause confusion or matters such as the exclusion of vulnerable entrepreneurs, particular those from BAME communities. Which have been neglected by many of the banks over the years.
Please note, I have derived at these points and questions by carefully listening to your economic strategy and its objectives whilst having multiple discussions with our customers, lending partners and stakeholders
“Protecting the income of the most vulnerable”
When you mentioned this on the 27th March I leaped with joy as I understood the ‘most vulnerable’ to be entrepreneurs from underserved communities. The middle age afro-caribbean woman who runs the local hair salon. The ‘mum and pop’ store run by a migrant couple, who happens to sell the best pastries in town or the second-generation migrant entrepreneur who was never taught about credit because he grew up in a home which didn’t believe in borrowing. However, as I began to read your updates regarding BBLs, I began to wonder, exactly who are you referring to when you say the most vulnerable?
Considering the disappointment of the CBILs. It’s understandable that you would focus on businesses who are ‘unable to access finance fast.’ However, when I think of the most vulnerable my attention immediately draws to those who are at the risk of ‘not being able to access finance at all’ the kind of entrepreneurs I mentioned above. Allow me to explain why.
When I first started Lendoe* The British Business Bank had already introduced the EFG**. A scheme which was set up in 2008 to encourage banks to lend to small businesses. Businesses which look very similar to the three I mentioned above. Those who do not have the adequate security to provide the banks the surety they need when attaining finance.
Nonetheless reports from the Economic & Social Research Council allowed me to discover that eight years later, eight years after launching the EFG scheme, the same businesses from black and other ethnic minority communities; were still two to four times less likely to receive finance from their high street bank when compared to their caucasian counterparts.
This coupled with the fact that 50% of first-time business loan applicants that year had been rejected, is what led me to understand the lack of appetite and support high street banks had for small businesses who were either early stage of from less represented communities. It’s also what has lead me to wonder whether or not our biggest high street banks are culturally ready to support these entrepreneurs — even with the governments guarantees.
So what does this have to do with your decisions to launch the BBLs?
1. Your decision to pivot to this new method of assessing businesses to increase speed, although faster, could marginalise a significant number of the most vulnerable entrepreneurs. Those from black and other ethnic minority communities like the entrepreneurs I mentioned above. Who unfortunately, have already given up on the banks or have decided to bank with alternative finance providers who do not have BBLs accreditation.
2. Your decision to provide what some could argue to be a ‘vague’ description of the criteria required from small businesses; who are in line with the BBLs criteria has also caused anxiety amongst entrepreneurs from vulnerable groups. For example, will those with adverse credit, or thin credit files be considered? How about early stage businesses? i.e. those who are yet to have a business credit score or file their first set of annual accounts. Can they access these BBLs? It may sound like a small matter, but a large number of these entrepreneurs already fall in the category of discouraged and would only seek finance, if they fell that they’ll be accepted.
When we initially set up Lendoe in 2017, 3% of the SME market were would be seekers. Although this number seems relatively small — research found from the British Business bank displayed that if this same 3% of businesses applied for finance, applications that year would of been up by close to 50%.
I fear by leaving it to BAME communities to figure things out on their own, you run the risk of causing anxiety, confusion which could later lead to an element of panic. Which only decreases the likelihood of them making good sound decisions, increases their fear of rejection and in conclusion leads to them not applying on time, or even worse, not applying at all.
3. My last point is in regard to your comment about “Supporting vulnerable businesses to stay afloat”.
As I mentioned prior, the bounce back loan scheme so far has been a success. Those who have applied and been accepted have received or are due to receive funds in record speed and these funds will keep their businesses afloat. My question is, for how long? After our Prime Minister Boris Johnson’s announcement yesterday; it’s clear that a resurgence of the virus could lead to a second lock down. Leading to businesses having to cease operations again.
It’s because of this that I believe every business, both those which receive funds and those who do not, need to be equipped with the tools and training to understand the scenario’s which could occur and have the support which prepares them to manage and operate the resources they access via BBLs appropriately. In particular those from the most vulnerable communities, who run viable businesses which have never needed to rely on external capital due to their low start-up costs or positive cashflow cycles.
To stay afloat these businesses need more than just finance. They need advice — a service that the Community development finance institutions were providing before the introduction of the BBLs. Which resulted in banks pricing them out of their core market and stripping them of the customers they were built to serve best.
“A simple, quick, easy solution for those in need”
In conclusion, I’d like to reiterate firstly that the bounce back loan scheme is a success. After all, like you promised, its simple, quick and easy to access. Nevertheless, it has caused its own problems and many of us are still unclear about all of its features. For example:
1. It’s easy to access for some entrepreneurs, not all. The fact that there is likely to be a number of ‘vulnerable entrepreneurs’ who are unbanked who may not be able to access the scheme; despite the fact that they have viable businesses means this scheme might not protect the income of the most vulnerable.
2. Fixing the loan rates at 2.5% mean only lenders who have significant scale i.e. banks can become accredited. It’s understandable that the banks get priority due to their size and coverage. Nevertheless, we must remember the CDFI’s who were set up to support vulnerable businesses. Who play a significant role in supporting those from less served communities and have the frameworks and the infrastructure in place to support these businesses best.
3. We need more clarity around the requirements of the BBLs. This is to assure those who’ve already been rejected by banks in the past that they can try again. When we set up Lendoe a report from the British Business Bank informed us that 41% of today’s ‘would-be-seekers***’ do not apply for finance from banks because they’ve been discouraged. To ensure this subset of entrepreneurs apply for BBLs, we need open and informative updates which give us clear indications of the criteria required to be accepted.
P.S. On the 12th of May I attended a private webinar to discuss CBILs & BBLs with members of parliament and industry leaders. The host put on the webinar to discuss CBILs & BBLs and the performance of the schemes thus far. I put forward these 3 specific questions. Please find these outlined below. Thankfully all questions were answered and i’ll be providing the answers soon to our mailing list. Sign up by clicking here to be the first to receive them.
Questions
- The most vulnerable businesses are those ‘who are unable to access finance’ i.e. underserved communities i.e. BAME communities who have thin credit files or business accounts with banks who are not providing BBLs. What’s the panels plans to support these businesses?
- Prior to the introduction of the bounce back loan scheme, Community Development Finance Institutions played a significant role in supporting the most vulnerable entrepreneurs in the UK. Not only with capital but advice. What does the panel intend on doing to keep this critical industry alive considering that the majority of CDFI’s will lose their customers to banks who are providing BBLs.
- The rules of the bounce back loan scheme stipulate that entrepreneurs can only access a loan once. Considering our Prime Minister’s announcement yesterday; it’s clear that if a resurgence of the virus occurs we’ll need to go into the most extreme isolation measures. This would mean the most vulnerable businesses; those on the high street and in the hospitality sector will be forced to close their doors once again. What’s the government’s plans to support these businesses in the case that this occurs?
Definitions
Lendoe* A social lender which particularly focuses on underestimated entrepreneurs from underrepresented and underserved communities.
EFG Scheme ** a UK government-guaranteed lending scheme intended to help smaller viable businesses who may be struggling to secure finance, by facilitating bank loans of between £1,000 and £1 million.
Would-be-seekers*** A subset of entrepreneurs in the SME market who require finance and/or credit for their business but decide not to apply due to their experiences with the bank.
