Why are so many UK SMEs and start-ups missing out on government support?

By Daniel Rodgerson, Senior Associate in Corporate & Commercial 

We’re finding that many businesses simply aren’t qualifying for the government’s Coronavirus Business Interruption Loan Scheme (CBILS), predominately by virtue of them not being considered ‘viable’ by the banks before the coronavirus crisis hit.

There’s an obvious need to ensure people aren’t defrauding any support packages in place for businesses through this crisis period, but by introducing subjectivity through the inclusion of ‘viability’ in relation to lending criteria, has resulted in banks being overly cautious around lending to businesses that can’t demonstrate viability.

I believe that the current caution being exercised was not what was intended by the government when they stated, over and over, that they would “do whatever it takes”. What we do know is that the support packages are not reaching the bulk of SMEs and start-ups, who incidentally, are the very businesses who urgently need the valued support funding. They are, simply, falling through the cracks.

Why are SMEs slipping through the cracks for support?

Typically, start-ups and SMEs do not take much from their business because they are focused on investing for growth and attracting external investment. A large portion of founders don’t pay themselves salary or dividends from the business in the early stages, which has, unfortunately, resulted in them not qualifying for either of the government’s Job Retention Scheme or self-employed assistance.

Most company directors of start-ups and SMEs also don’t have the option to furlough themselves, as they will technically be in breach of the scheme if they claim the grant and choose to do any work during the furlough period. Even simple work tasks like arranging to pay suppliers, updating their website or improving technology could be deemed a breach, and furloughing both themselves and their staff would mean there would be no one left to run the business. Many also don’t qualify (or have not opted) to charge or recover VAT, and therefore don’t qualify for the VAT deferral on offer either, and as the relief does not cover VAT MOSS, those operating in the digital space will not be able to defer such payments.

All these complexities pose government and lenders a real quandary, but many SME leaders are pushing for this to be something that needs urgent attention and recognition, with a potential solution required immediately.

It’s common for start-ups to seek equity funding, but there isn’t anything currently available to encourage such investment in environments like the one we’re in right now. Venture capital firms, private equity houses and other investment vehicles want to protect their portfolio companies first and foremost, and therefore many aren’t considering investments in new or loss-making businesses. At least with the CBILS, the banks are mostly protected by the government if such businesses fail. The same protection isn’t available for investors, yet.

Of particular concern are those businesses that require significant initial investment into research and development in the early stages, notably tech businesses. These are surely doomed to fail without any support, as they can often be loss-making for longer periods than those in other sectors.

Has the government purposefully forgotten about these start-ups?

I don’t think the government has forgotten– they’ve set up funding systems for the masses first, which is understandable. But, as I say, these are the types of business that have simply fallen through the cracks of the support that’s available right now.

The government needs to consider criteria that’s been specifically designed to capture these SMEs and start-ups, many of which are pioneering innovation in a range of existing and emerging markets – something the UK is hailed for globally.

I believe that the government has relied on HMRC for statistics on which to base the support, which has inadvertently caused the gap, as many smaller limited company directors often don’t do things so ‘traditionally’.

Instead, and often to keep their business going, some company directors will create overdrawn director’s loan accounts instead of paying themselves by way of consistent salary and/or dividends and they are also often encouraged to take other efficient tax steps, including payments into pensions. All of these have distorted the traditional view and caused such individuals to miss out on the current support options available.

What now?

The majority of businesses we’re speaking to are now in crisis survival mode – many of whom have a real fear that they may not last the course of this unprecedented event without specific support becoming available.

Passionate leaders who believe in their business will likely have to apply for ‘normal’ loans, which will inevitably come with higher interest rates, immediate or unrealistic repayment periods or other unfavourable terms for a business at this stage. Many would prefer an equity option where shares in the business are given away instead of having to make consistent repayments, as a small piece of the pie is better that no pie at all!

Currently, I believe that France is leading the way in its efforts to protect start-ups, but my view is that we need something even more refined and attractive here in the UK. Start-ups need equity choices, better debt products and a support wage (based on a number of factors that aren’t currently included within such calculations). Such steps could include government-matched or backed investments, an increased favourable tax position for investors in order to stimulate activity and, arguably, they may also need to reverse the changes made in the Budget to Entrepreneur’s Relief to encourage individuals to reinvest into start-ups following a sale of their business.

It’s clear – and understandable – that the government is concentrating its funding support and economic efforts for businesses around short-term survival, but the reality is that it has created huge challenges for so many SMEs and start-ups across the country.

The UK is recognised as one of the world’s leading countries when it comes to encouraging and stimulating small businesses and entrepreneurship, so why is the government not taking any steps to prevent these from slipping into the abyss? I understand there isn’t a quick fix to this problem, but we urgently need a solution with some real thought behind it in order to prevent abuse and save our SME and start-up communities. Based on the current support on offer, so many of our precious small businesses will fail. So many of these businesses are only ever a few weeks and months away from failure, even in the good times. This is a real concern right now, and evidentially already too late for some. But now is the time to act.