The recovery loan scheme (RLS), designed by the UK government to encourage lending to small businesses as they come out of the pandemic, has been deemed a complete failure by industry experts.
The RLS was launched in April 2021 to support businesses after the pandemic. Under the scheme, the government guarantees 80 per cent of the financing to the lender, with loans available through a number of accredited lenders. It comes to an end today (30 June).
According to data from the British Business Bank, the RLS had 76 accredited lenders in October 2021. It had provided £1bn to businesses through 6,190 facilities. A number of peer-to-peer lenders also received accreditation under the scheme, including LendingCrowd.
But Gregory Taylor, head of banking and finance at accountancy group MHA, said that the scheme “failed in its role of unlocking commercial lending for small- and medium-sized enterprises (SMEs).”
He said that the scheme was “notably less generous” than the previous loan schemes like the coronavirus business interruption loan scheme and the bounce back loan scheme, and as a result, fewer SMEs applied and those that did were frequently rejected by the commercial lenders.
“The system is not working,” he added. “With rising inflation and interest rates and the real possibility of a recession the government should use the end of the RLS to reboot commercial lending for SMEs.”
A new scheme needed
Taylor called on the government to introduce a new scheme to support businesses.
“The new loan scheme should see the government guarantee increased back to 100 per cent,” he said. “This was the case under previous Covid-19 support schemes but it was lowered to 70 per cent under the recovery loan scheme.”
“Increasing the guarantee will encourage lending to a wider variety of companies, especially those in hospitality and retail. In addition, the new loan scheme should come with an interest free period of 6 to 12 months to allow businesses breathing space in the current economic environment.”
He also suggested that eligibility should not be based on the impact of Covid-19, as this is difficult to prove.
He added: “Whatever happens we must avoid the scenario that unfolded with commercial lending in 2008.”
In May, there were reports of a new £3bn loan scheme to offer loans of up to £2m to SMEs, backed by a 70 per cent government guarantee, requiring personal guarantees from borrowers.
Demand for working capital to grow
Research from Manx Financial Group found that 22 per cent of SMEs that needed external financing over the last couple of years were unable to access it. Meanwhile, 27 per cent have been forced to pause or stop their activities, with businesses in manufacturing, finance and accounting, retail and IT and telecoms feeling the most impact.
The biggest barriers to access to financing were costs, processing times and a lack of flexibility with repayment terms.
Douglas Grant, chief executive of Manx Financial Group, said that as RLS is ending and demand for working capital set to increase, a sector-focused government-backed loan scheme could help SMEs.