Hilton Smythe Group, a UK-wide business and finance brokerage service, has warned that the tightening of lending regulations caused by Coronavirus could reduce the pool of potential buyers, leading to a business sales crisis.
The Bolton-based firm has observed an increase in demand following lockdown, with an 84 per cent increase in enquiries from prospective purchasers between June and August. However, with the government focusing on the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounceback loans, and scrapping the Enterprise Finance Guarantee (EFG) scheme, buyers without secure capital in the bank could struggle to get the funding they need to complete the sale.
Prior to lockdown, the EFG scheme allowed a potential buyer to purchase a new business where they had relevant experience, the business appeared to be a robust prospect, but where they did not have adequate security behind them to guarantee their loan.
This could be, for example, in the form of savings, property, or pre-existing business assets. In 2019, more than 1,800 loans had been drawn down under the EFG scheme, totalling £202 million.
CBILS were introduced in March to temporarily replace this government scheme with an emphasis on buyers who either have ready cash or can secure finance against existing assets to cover the cost of a business.
Hilton Smythe Finance estimates that approximately 20 per cent of buyers of small businesses utilised the EFG scheme when buying a business, due to a lack of security which banks require as part of their lending decisions.
Gareth Smyth, CEO of Hilton Smythe Group, said: “It’s encouraging to see that enquiries and business sales are now back on the rise, however we are increasingly finding that unless we have a cash buyer or someone who has sufficient capital or assets behind them to secure funding against, lenders aren’t forthcoming.
“This could previously be offset by the government’s EFGs scheme, which was replaced in March with CBILS, however this does not adequately support those without existing security. This will, of course, impact on buyers who are a good fit for the business but cannot get the money because of the banks’ lending criteria.
“The entire reason the EFG scheme was introduced in the first place, back in 2009 following the financial crash, was to promote entrepreneurial spirit amongst those who had the skills but not the security in the background against which to borrow money. It was a huge saviour then, and if the government would reinstate it, rather than replacing it with CBILS and Bounceback loans, it could prove imperative to the business economy again.”
Gareth added: “It concerns me greatly that the government could extend the CBILS and Bounceback loan schemes without reintroducing the EFGs or creating a similar scheme which supports entrepreneurs without existing financial security.
“It certainly still has a role to play alongside the very specific COVID-19 interventions the government has put in place, so that companies can be bought and sold utilising by anyone with the drive to make the business work.
“It is essential that, as the country rebuilds after lockdown, that we support the new wave of entrepreneurial spirit for those who have all the means necessary to successfully buy and run a business but cannot because they don’t have assets and the banks are too risk averse.”