[Editor’s note: This is a guest post from Ryan Weeks, formerly with Dow Jones and AltFi, covering fintech. This is part one of a four part series he is writing for us on the UK fintech market in the run-up to LendIt Fintech Europe.]

Shortly after the UK’s lockdown in March, Chancellor Rishi Sunak unveiled its £ 350 billion emergency bailout for UK businesses.

This unprecedented intervention laid the groundwork for a handful of government-guaranteed loan programs that have completely changed the fintech lending landscape in the past six months.

The three flagship programs are the Coronavirus Business Interruption Loan Scheme (CBILS), which offers an 80% guarantee for loans up to £ 5million; the Coronavirus Large Business Interruption Loan Scheme (CLBILS), for large companies wishing to borrow up to £ 200 million, still with an 80% guarantee; and the Bounce Back Loan Scheme (BBLS), which offers a 100% guarantee for loans up to £ 50,000 for micro businesses.

Using these initiatives alone shows how valuable they have been to UK businesses. As of August 16, £ 13.68 billion had been distributed through CBILS and an additional £ 3.5 billion through CLBILS.

BBLS, despite its later launch, became an overnight sensation; more than £ 8 billion had been approved by the time the government released its first update on the program on May 10. The latest figures show a total of £ 35.47 billion has been loaned through BBLS.

The advent of foreclosure in the UK was, to quote an executive at a business consultancy firm who wished to remain anonymous, “almost disastrous” for fintech lenders. He said commission income for the major platform lenders during the months of April, May and June was “close to zero”.

For fintech lenders operating under these conditions, government interventions have been a lifeline. Some, like the UK’s biggest lender, Funding Circle, have become entirely dependent on lending money through CBILS – to the point of suspending all other P2P loans and investments.

The platform brought in new sources of wholesale funding, including fintech firm Starling Bank, to help support its CBILS loans.

In May, Starling agreed to lend £ 300million to SMEs through the Funding Circle platform as part of CBILS. The start-up has also loaned significantly more money to its own small business clients directly through BBLS.

Declan Ferguson, chief strategy officer at Starling Bank, said the merger with Funding Circle was a good way for the company to leverage its rapidly growing deposit base, which topped £ 3 billion in July 2020 , compared to £ 600 million as of that date. Last year.

However, there have been complaints that the government has not acted quickly enough to involve fintech lending platforms in the first place.

“It would have been great to see a greater involvement of fintech in [the schemes] and earlier, mainly because from what I’ve seen in the fintech space, some fintechs have a great ability to qualify loan recipients, ”said Liam Gray, fintech manager at Tech Nation, the funded group by the government.

The responsibility for authorizing lenders under government guarantee programs rested with the British Business Bank, a taxpayer-funded lender.

The big banks first walked through the door, but fintech lenders were phased out from April, and there is now at least a dozen approved lenders.

But the loans issued under the various public schemes must be financed in the first place by the lender, and May reports show that, even after being approved, fintech lenders have struggled to set up their emergency lending programs due to the need to put in place new agreements with lenders and put in place new special purpose vehicles.

Ravi Anand, managing director of corporate lender ThinCats, said his company spent £ 1million just on legal fees when it was founded under CBILS.

Anand, however, disagrees that it was difficult for platforms to obtain funding for emergency lending programs – as long as the platform in question had experience working with the BBB and institutional investors.

“I don’t think it was difficult to get backers, I had seven offers in two weeks. In fact, investors desperately want access to CBILS because it’s so attractive, ”he said.

Another problem – frequently highlighted by those lobbying the government to harness the capabilities of fintech companies – is the fact that banks have been able to fund their emergency lending programs with funding directly from the Bank of England.

The term finance program with additional incentives for small and medium-sized enterprises was introduced on April 15, allowing eligible banks and building societies to access financing over a period of four years at a rate close to the bank rate.

Fintech lenders, on the other hand, depend on wholesale funding – and the institutions they work with typically demand a return of between 5 and 10 percent, according to ThinCats’ Anand.

This gives banks a big advantage in that they can offer more attractive rates than most fintech companies.

Anand, however, admitted that it would be a “challenge for the Bank of England to start giving money directly to lenders” such as ThinCats.

The government’s emergency loan programs are scheduled to end on September 30.

Charlotte Crosswell, chief executive of influential lobby group Innovate Finance, said that even though requests close at the end of the month, lenders will have a few more months to process those requests. She added that the platforms are currently seeing an increase in demand for CBILS and BBLS loans, as businesses take on credit as long as the collateral remains in place.

Crosswell wants to see a more in-depth debate on the future of government guarantees in SME lending.

“We don’t think we’re ready to withdraw all government guarantees just yet,” she said.

Sachin Patel, Capital Director at Funding Circle, agrees.

“The CBILS diet is a ‘wartime’ diet, designed for an unprecedented pandemic. We are still effectively in “wartime” conditions and businesses will be affected. “

One possibility for the future of the scheme is that guarantees will continue to be offered on loans in sectors particularly affected by the pandemic, such as the travel industry.

Ultimately, the real test of the program’s success will come when the inevitable flaws begin to surface.

It is therefore rather worrying that two-thirds of the loans distributed under the various programs supported by the government went to “first-time borrowers”, according to Crosswell.

Over time, the due diligence of fintech lenders who were active during this time will be tested. It would be frowned upon on their part to prove a disproportionate burden on UK taxpayers.

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