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Governments Have Promised Small Business Loans. Getting Them Isn’t Easy.

On both sides of the Atlantic, programmes offering billions of dollars in government loans to small businesses have made for powerful headlines. But these loans, typically distributed by commercial banks, come with plenty of hurdles for those who need funding most.
Bank office blocks in Canary Wharf, London. Government funding for small businesses is made available through accredited lenders, many of them commercial banks. | Source: Getty
By
  • Rachel Deeley
BoF PROFESSIONAL

LONDON, United Kingdom When the coronavirus crisis hit the fashion industry, Mustafa Fuat knew that his company, a London-based luxury womenswear manufacturer that supplies the likes of Ralph & Russo and Roland Mouret, would need financial support.

On March 16, when he first approached his bank of 10 years about the prospect of a loan, before the UK government had announced rescue measures, he was told he would need to go through a credit check, sign a personal guarantee and expect an as-yet-undetermined interest rate, which he found strange since the bank was aware of his accounts and could see that the business had long been healthy and, aside from an arranged overdraft to cover late payments from clients, debt-free.

When the UK Government rolled out its Coronavirus Business Interruption Loan Scheme (CBIL) on March 17 and he went back to his bank, one of the lenders the state has accredited to distribute the loans, to ask about accessing them, things weren’t much better. “I would have to fill in an application and then wait,” said Fuat. “They said it would probably take seven to 10 days to get an answer, and then, because I’m the director, I would have to personally guarantee it... So, if my business goes under, I’m still liable for it.”

Fuat is not the only small fashion business-owner seeking much-needed access to cash and running into roadblocks. Across the industry, small companies operating season-to-season and managing large overheads are up against the clock when it comes to accessing crucial funds in the midst of this crisis.

“The conversations we’ve been having with member brands, particularly SMEs [small and medium enterprises] is really about the cash runway,” said Helen Brocklebank, chief executive of UK luxury industry lobby group Walpole. “How do you manage your cash so that you can ride out what will hopefully be a time-limited period of very few sales? The real challenge is getting access in a timely fashion because small businesses in particular have very narrow bandwidth for liquidity.”

But signing personal guarantees for government loans is a step most small business owners are highly reluctant to take. “Say the worst happens and your business goes under, the banks are going to come for you,” said Fuat.

“Many small brands are reluctant to even look at the loans at this stage as they are concerned that they might not have a business at the end of all this,” said Adam Mansell, chief executive of UK Fashion and Textiles Association. And those who are applying for loans “are finding accessing the scheme incredibly difficult,” he added, as many of the banks that the government has accredited to distribute the loans are averse to taking on new clients.

Businesses, and in particular small businesses, were the first part of the UK economy to be addressed by the government's coronavirus bailout plans. Chancellor Rishi Sunak's headline pledge of £330 billion ($407 billion) for small business loans of up to £5 million with an 80 percent government guarantee sounded promising for many companies concerned about the economic fallout of Covid-19. But for a number of small business owners, the reality of accessing such financial support proved to be a lot more complicated.

The real challenge is getting access in a timely fashion because small businesses in particular have very narrow bandwidth for liquidity.

In order to access funding under the CBIL, applicants need to go through one of 40 accredited lenders, which include the main commercial banks such as Barclays and HSBC. However, many details of the loan are left at the discretion of the lenders themselves.

According to British Business banks, the 80 percent government guarantee actually goes to the lenders rather than the recipient of the loan. The scheme also permits lenders to ask for a personal guarantee on loans exceeding £250,000, with the caveat that the applicant’s primary private residence is not up for stake (although Mansell of UKFT said that some banks are nonetheless asking applicants to put their home up as collateral). HSBC is reportedly among the banks that require personal guarantees from company directors for such loans. When reached for comment, a spokesperson for HSBC said that it reviews security requirements for loans over £250,000 on an individual basis and “if a personal guarantee is deemed appropriate, it will be only in an amount up to a maximum of 10 percent of the loan amount we agree with the customer.” The bank also confirmed it does not ask a personal guarantor to pledge their home as collateral for the CBIL.

When reached for comment on banks that are offering loans or terms out of step with CBIL, British Business Banks said, “this is an issue that we are aware of and we are working with banks to sort it.”

On the other side of the Atlantic, businesses are facing a similar problem. As the US Government's hotly anticipated CARES Act was signed into law, some $350 billion in small business loans were made available through the US Small Business Association (SBA). The main appeal of these loans, aside from low-interest rates, is that they will be mostly forgiven if the funds are allocated to specific costs such as payroll. While banks themselves have struggled to access the SBA's slow and often broken online system to process loans, businesses on the receiving end of the programme have faced surprise eligibility requirements.

Christopher Skinner is the founder and principal of School House, a New York-based creative agency for beauty brands that counts L’Occitane and Cuvée among its clients. When the CARES Act’s flagship business loan, the Payroll Protection Program, went live on April 3, he went straight to Bank of America, his business bank of five years and personal bank of 15 years, to apply for the funding programme. However, he was disqualified from receiving the loan due to eligibility criteria that BofA had established independent of SBA guidelines: only small business clients with a lending and deposit relationship with the bank were eligible to apply for the programme through them.

“Throughout my five years building School House it has always been my prerogative to build this business without incurring debt,” said Skinner, “which means I only have one of the two BofA-instilled stipulations to qualify for the forgivable lending.” He tried opening a credit card, which was approved, in order to meet this requirement, only to find out that “the bank also put in place that it must have been open by mid-March in order to block small businesses, like myself, that are willing to do anything to receive the forgivable lending.”

Salary is not our biggest expense; [covering] payroll is barely scratching the surface.

BofA’s additional eligibility criteria are particularly problematic because the SBA has reportedly advised banks to prioritise existing clients — meaning Skinner would be at the bottom of an already crowded pile if he looked elsewhere to access the funding.

For those who have had better luck accessing them, the small business loans available do not necessarily recognise the specific concerns of fashion companies. Rolling out a loan programme that emphasises payroll does little to help small fashion brands, which often operate with small teams but must spend considerable sums to finance the production of their goods before being paid by third-party retailers, many of whom have cancelled orders or delayed payments as they, too, suffer the impact of the crisis.

“[The loan] really doesn’t take into consideration product — and that’s our biggest loss,” said Beckett Fogg, co-founder of New York brand Area, which only has a staff of six. “Salary is not our biggest expense; [covering] payroll is barely scratching the surface.”

The loan also does not account for fast-growing companies that may nonetheless face financial turmoil. Similar to the UK’s CBIL scheme which looks at a business’s performance over the last 12 months, the Payment Protection Program takes an average of 2019 financials and requires businesses to show that they have incurred a significant loss due to the coronavirus. “When you look at the books from a revenue standpoint, yes we are still growing,” said Fogg. “That doesn’t mean we’re not impacted financially.”

While some small businesses are tasked with navigating bureaucratic challenges of the various government funding options available, others are falling through the cracks. Berlin-based label GmbH is one such example. “The main issue for us is that our needs fall between the small grants given to individuals and small companies and the big state-funded loans,” said GmbH co-founder Benjamin Huseby. He said that the business was eligible for the German government’s immediate cash injections of €5,000 to €15,000, but this is “not nearly enough to cover the costs of the losses we are facing.” Similarly, state assistance for furloughing employees “is not incredibly useful for us, as we already have such a small team,” he continued. “We would need to fully stop operations for this to be of any use.” While there are also state-subsidised, interest-free loans available as part of the German government’s “bazooka” method, these are primarily aimed at larger, more established businesses. “The irony is that we are too small and young, yet too successful.”

With an industry as global as fashion, sometimes country-specific aid schemes have their challenges and limits, as menswear designer Spencer Phipps has found. As an American based in Paris, he said, “I’m already at a huge disadvantage in that I don’t know the system in normal times.” His namesake line, Phipps, is “for the moment… okay, and that helps,” owing to small-ticket items available through his own website and a recently launched line of curated vintage pieces, which he said were easy to procure and a good source of cash flow while he deals with shuttered retailers and warehouses.

However, Phipps knows that the time may come for him to seek funding from the French government. He said that it was easy putting his staff of three on partial "chomage," or furlough, but obtaining funding, even if he qualifies, could still mean "jump[ing] through a lot of hoops." While "the Fédération [de la haute couture et de la Mode] has been extremely helpful" in providing legal counsel and business advice, he said, "the whole system is overwhelming... It's like casually being asked a trigonometry question."

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