Christopher McLean, head of debt advisory in Grant Thornton’s London office, explains why platforms must ensure that new borrowers are fully compliant with the British Business Bank’s loan eligibility requirements to ensure the validity of the guarantee…
Peer-to-peer lending platforms which are authorised to offer the coronavirus business interruption loan scheme (CBILS) should take extra care to ensure that new borrowers meet the scheme’s eligibility criteria, so that the government guarantee is valid should it ever need to be called upon in the future.
Christopher McLean, head of debt advisory in Grant Thornton’s London office, has noted that lenders are taking different approaches towards the eligibility criteria, with traditional lenders such as high street banks taking a more conservative approach towards CBILS loan approvals. He has warned CBILS-approved P2P lending platforms should think two years ahead when assessing new borrowers, as their investors could wind up bearing the cost of any mass defaults.
“In two years’ time when there may be defaults, there are recovery shortfalls and hence the guarantees need to be called upon, it is likely that lenders will be asked to demonstrate that such loans advanced to borrowers were fully compliant with all the criteria at the outset,” he says. “Lenders need to take care that they’re applying the criteria correctly so that the guarantee is valid whenever they might need to use it.”
Lenders will be seeing a wave of new applications as the CBILS closing date approaches, possibly from borrowers who have already been rejected elsewhere, so thorough due diligence is essential, McLean says. P2P lending platforms should also be aware of a predicted spike in unemployment towards the end of the year, as the government furlough scheme comes to an end. “We are seeing a lot of businesses forecasting further liquidity pressures towards the end of the year,” McLean says. “And for a lot of companies, there may be a liquidity gap there.”
Applicants also need to be able to demonstrate and self-certify that they have been impacted by Covid-19, and that they have a good prospect of being able to trade out of these difficulties with funding support. “It’s important to really test the borrower’s ability to meet those criteria,” says McLean. “What we’re seeing in the market at the moment is that different lenders are interpreting the criteria differently.
“Traditional lenders such as high street banks are probably taking a more prudent interpretation of the criteria, while alternative lenders and challenger banks maybe have a slightly wider interpretation as to who’s eligible for the scheme and who’s not.”
If there is any doubt as to the eligibility of a particular borrower or the criteria in general, platforms should communicate directly with the British Business Bank.
“If you’re a P2P lender, you need to make sure that how you apply the criteria to your borrowers is in accordance with the British Business Bank guidance,” he says. “And to the extent you have any uncertainty, speak with the British Business Bank and make sure you ask questions; other lenders that we’ve been speaking to have spent a large amount of time on the phone or video calls with the British Business Bank, making sure that they are interpreting the criteria correctly.”
This added due diligence is likely to require more time and resources from platforms, but McLean points out that this is not necessarily a bad thing. Amid tightening regulations and an uncertain economy, P2P lending platforms will be under additional pressure to demonstrate that they have what it takes to compete with traditional lenders at every level.
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