How lenders can get rid of the BBLS hangover
Protecting your reputation
The Bounce Back Loan Scheme (BBLS) has been the subject of much scrutiny in recent months. Since its inception at the beginning of the Covid-19 pandemic, the scheme has attracted significant attention. It was developed and rolled out very quickly to respond to the rapidly changing economic environment. As small and medium sized businesses were forced to close, the Chancellor put in place measures to support them through lockdown, to enable them to pay for things like rent and staff costs, as well as making their premises Covid-secure for staff, visitors and customers.
But the speedy response came with its faults. The BBLS has been targeted by fraudsters who have claimed money on behalf of bogus firms. It’s also meant that, because the loans were self-certified, with a lack of affordability checks, the customers’ ability to repay the loans is compromised.
At the time the scheme was launched and the first loans were issued, no one could have predicted the path of the novel coronavirus, and its impact on the UK and the world. People understandably went into panic, and previously solid, established and financially stable companies would have reacted by taking the precious loans.
The result? 1.3m loans have been issued, with a total value of over £40bn at an average of £30,000 per loan.
But what happens next?
With just six months left before BBLS customers will need to start making repayments, the scheme, the government and the lenders will be under more scrutiny than ever. Lenders had just about recovered from the beating their reputations took in the global financial crisis of a decade ago. Now, they’re facing further attention, especially as the BBLS is funded by the public purse. Getting the next stage of the scheme’s lifecycle right is critical to protect the fragile reputations of lenders, and the increasingly fragile government ratings.
As lenders begin to collect payments from BBLS borrowers from May 2021, they and the government will be under the microscope, with the press and business groups waiting for a foot to be put wrong.
Up to £26bn that’s been loaned to SMEs in the UK is expected to be fraudulent or is expected to default on repayments. Managing such a mountain of arrears in such a short space of time is likely to place a significant burden on lenders. Stress levels are already high, and increasing amongst SMEs, many of whom haven’t managed to recover from the initial lockdown, and many of whom are under a second phase of lockdown. Handling the expected level of arrears, and handling them well, will be key to protecting lenders’ reputations.
So how can lenders ensure the Bounce Back Loan Scheme delivers good outcomes?
The 3 Rs
1. Relationship building
Many BBLS borrowers will have taken out the loan from a lender which is different from their usual bank. Not all banks have been part of the scheme, and those that were placed limits and restrictions on the number of loans issued. And here lies the opportunity. BBLS lenders have the chance to build new relationships with these new business customers, using Open Banking to get complete visibility of their finances across different banks. By doing so, banks can create a more personalised, appropriate and accurate suite of services, based on affordability and behaviour.
For many businesses, 2020 will have disrupted their normally stable finances. Using Open Banking these new customers will be able to present a more realistic view of their situation, allowing for forbearance from lenders during this time.
2. Realistic repayments
When setting up repayments for the BBLS loans in 2021, lenders should ensure a fair and responsible approach. Using Open Banking they can quickly and accurately assess SMEs for genuine affordability. By doing so, they will ensure that the agreed level of repayments are possible, and that the business doesn’t spiral into further debt.
Such payment plans offer flexibility, and can be adjusted quickly to reflect sudden changes in future circumstances. For example, Open Banking will enable the lender to see whether the business has been able to recover revenue levels, and assess their level of debt owed elsewhere.
Not only does Open Banking enable quick and accurate assessments, it enables lenders to make fair decisions based on genuine affordability. Using this approach will help lenders to protect their reputations by delivering innovative and fair collections of payments back to the government. With the scheme under the microscope, such fair treatment will be welcomed by all parties.
3. Responsible consumer-style approach
Many small businesses that have taken out BBLS loans are owned and managed by skilled blue collar workers, “one man bands” and hobbyists. Their business has been stable and secure, perhaps for many decades. This unexpected and sudden loss of income caused by the pandemic will have hit them hard. Their revenue isn’t just for shareholder dividends, or for reinvestment, it’s to pay household bills and put food on the table.
Because of that, many SMEs should indeed be treated as consumers. They should be offered forbearance and support measures, just as if the BBLS loan was a mortgage or personal loan. Lenders should be looking out for, and be able to spot vulnerabilities in such borrowers, to ensure they’re treated fairly and appropriately.
Open Banking will provide lenders a genuine picture of the SMEs finances, both personal and business, as they will often overlap and intertwine. Without Open Banking, decisions can only be made on the one BBLS account, not taking into consideration the many other factors in play.
In short, using Open Banking to support the entire BBLS loan lifecycle will not only prove beneficial for customers, but for lenders too. By operating with forbearance and affordability at the core, lenders of BBLS loans will be able to demonstrate a fair treatment of borrowers, and protect their reputations. The government in turn will be able to recoup funds at sustainable levels, while ensuring support is in place for those who need it.