The End of Government-Backed Loans – A New Funding Landscape for SMEs

Business Funding

By Glyn Jones, Funding Director at Ascendis Funding Solutions


Small and medium-sized businesses have often found securing funding an issue, especially among traditional lenders such as banks.

However, in the last few years, the financial support offered by the British Business Bank (BBB), which has been backed by government guarantees, has created greater availability of funding.

These loans have now drawn to a close with the Recovery Loan Scheme (RLS) ending in June, and businesses are already struggling to acquire the finance they require.

The RLS is thought to have lent more than £3 billion to businesses, so turning the tap off on such a useful funding source will likely have a big impact.

Recent research, produced by lender and banking services provider, Manx Financial Group PLC, has shown that more than a quarter of small and medium-sized enterprises have already had to pause their plans for investment due to a lack of finance over the last few years.

This was at a time when more support was available, so the future funding landscape certainly looks uncertain for many SMEs.


On the horizon

Although the RLS has ended now, along with the other funding options introduced to support businesses during the pandemic, we are still in a period of upheaval for many small firms.

Rising costs, the prospect of a recession and challenges with trade mean that access to finance is probably as, if not more essential, than during the pandemic.

Rumours had been circulating that the Government intended to extend or produce an alternative to the RLS with the BBB, which had a similar level of backing.

In fact, according to a scoop by the Financial Times earlier this year, it was revealed that the Treasury were in talks with the banking sector about making government-backed loans to SMEs permanent to help businesses grow.

This new funding option would mirror previous Covid financial support schemes, including the use of government backing to give banks the confidence to loan to more businesses.

It might include a personal guarantee requirement, according to the reports, and would in some ways mirror the Enterprise Finance Guarantee (EFG) scheme, which was previously available to businesses who had been turned down for a normal commercial loan due to a lack of security or a proven track record. 

It is believed that the focus of any future funding would have to be on growth, rather than survival, but whether these rumours will amount to anything is a big question.  

Given that we now face a leadership race in the Conservative Party for the new Prime Minister, and the Chancellor thought to be at the helm of these changes has now resigned, there are no certainties that a replacement for the RLS or other government-backed financial support funding will ever exist.

So where does this leave businesses in need of funding now?


Alternative approaches

Given the current set of circumstances, SMEs need to look at alternative finance routes if they are struggling to secure funding from traditional lenders.

One thing to consider is raising finance from existing assets. Either those unencumbered or through refinancing existing funding facilities onto more competitive deals.

There are more lenders now willing to also offer funds specifically designed with security on a second charge on personal property, which can also allow for reduced interest rates, so that’s something for business owners to consider if they are willing to put their own assets on the line. 

One major asset that is often left untapped is the sales ledger. Invoice finance is now more than ever an option to consider and there are multiple products to suit each business’s circumstances.

You could raise funding against an individual invoice, all invoices for only one customer, or your entire sales ledger.

One of the key differences in utilising a full invoice finance facility is that the personal guarantee that is required is typically capped at around 20 to 25 per cent of the exposure, whereas for an unsecured loan, a personal guarantee would be for the full amount. 

Another option to improve cash flow is to fund the liabilities a business has to HMRC; a request that every lender can understand. Company owners should consider the benefits of funding their VAT payments, which would move the repayments in line with their other monthly outgoings and improve cash flow.

Corporation Tax and personal tax returns can also be funded too, which again, can help spread the costs and avoid larger single repayments which can put cash flow under pressure. This can be achieved through tax-specific loan facilities from specialist lenders who fully support this method of borrowing.


An attractive prospect

As well as looking at new methods of funding, those looking to borrow need to look at how attractive they are to potential lenders.

Many lenders now have a decreased appetite for providing funding – largely due to most applicants already having debts left over from the pandemic – and so owners need to focus on the serviceability of any new debt and being able to evidence it.

Just like a personal mortgage, lenders want to know that a business can afford the repayments, which is why it is important to plan before requesting more finance.

We would generally recommend three months of ‘good behaviour’ with bank account conduct, which includes minimizing spending where possible and cutting back on expenses.

Showing that you are responsible for your spending can make all the difference between obtaining finance or not.

Don’t forget about personal conduct too. Everything might stack up on an application in terms of the business, but if a director’s personal credit history search shows up poor conduct, then it may affect the lender’s decision. So, it’s important to keep on top of your finances. 

When planning, business owners should also carefully consider their funding requirements. This includes making sure they have sufficient funding to cover their investments and plans.

With the help of your accountant, forecasting can help to produce a useful finance plan for a business and support an application.

Unfortunately, business owners also need to be prepared for personal guarantee requests, as these are likely to make a strong comeback now that government-backing has been removed.

If owners are worried about this, they can also consider personal guarantee Insurance, which the company can pay for, and which can reduce the risk of your personal assets being affected in future.


The value of advice

If businesses are struggling to secure the funding they require, then speaking with an expert, despite the costs involved, could make a substantial difference to the outcomes they enjoy.

Often it can be the difference between securing the funding required or not. Rather than delay investment and growth, why not get ahead of the competition and seek the guidance needed?

Don’t wait, now is the time to act!



Akeela Zahair