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The Cost of Credit

Analysis on the price of credit within the UK SME lending market.

20th January 2021

There has been a significant amount of cheap credit stimulus provided to the SME market over the past 9 months. This is due to a UK taxpayer guarantee called the Coronavirus Business Interruption Loan Scheme or CBILS. The additional stimulus aims to preserve the UK SME economic landscape until the pandemic subsides, which we hope is soon.

The price of credit for small and medium-sized businesses within the UK has been distorted due to CBILS, which is currently being offered by the British Business Bank. This is a phenomenal scheme that protects institutional investors, mainly large banks, through a taxpayer guarantee of up to 80% of the defaults. 

This approach stimulates and incentivises institutional investors to lend capital to small businesses – crucial for the preservation of the economy during a time of crisis. The relevance for Crowd2Fund is that the way the scheme is currently designed, ensures that the cost of the credit i.e. the interest rate of the loan that is offered is artificially discounted via the taxpayer guarantee. 

This artificial discounting is having an impact on other lenders like Crowd2Fund, who are not compatible with the CBILS scheme which is designed to support larger institutions and banks. This is the main reason why there is currently reduced deal flow, and coupled with a strengthening of our credit policy, means that it’s harder to find businesses to list on the platform.

Nevertheless, Crowd2Fund is still able to compete because of the flexible Revenue Loan product that we offer, which can run alongside any CBILS loan a business takes.

The good news for Crowd2Fund and its investors, is that the CBILS scheme should be changing during Q1 in 2021. According to the Financial Times, it will be replaced with a more permanent scheme that continues to support the release of institutional capital through a taxpayer guarantee. However, it does not artificially skew the price offered to the businesses – thus allowing more lenders into the market who can generate better and fairer returns for the British taxpayer given the level of risk they are taking.

When this new scheme comes into force, private credit markets and platforms that were not on the approved lender list generated by the British Business Bank will once again be able to attract businesses by offering a competitive interest rate. Under the current circumstances, it would be unfair for Crowd2Fund to offer a discounted interest rate to investors given the level of risk they would have to undertake.

We have a number of interesting businesses in the pipeline already this year, who are offering attractive interest rates and great rewards. We will continue to work tirelessly to list and find great businesses to invest in. Crowd2Fund have an exciting year ahead, as we aim to increase the number of businesses on our platform significantly, and any changes to the government stimulus offered will be reflected in the volume of deals listed. 

If you want to learn more about the replacement scheme then have a read of the article on the Financial Times here:

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Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.