Bank of England launches lending programmes as SMEs face cash flow strains

The Bank of England has launched a new Term Funding Scheme and a reduction of the UK countercyclical capital buffer rate in a bid to boost demand and curb low cash flow facing banks and businesses amid Coronavirus.

“The interest rate cut is just one of the measures the Bank of England has announced today. Possibly more important than the interest rate cuts are the two lending programmes. That’s the reduction of the counter cyclical capital buffer to zero percent – with the immediate impact of that is that provided banks lend out to businesses and they can access funding from the Bank of England at zero percent,” says Joshua Roberts, associate director at Chatham Financial.

“That’s really significant to help small businesses through the outbreak. The other one is the Term Funding scheme (TFS) which again adds incentives for banks to lend out to small and medium enterprises. So those two are really targeted at supporting business through the outbreak. And I think they’re more significant than the headline rate cut.”

The launch of the new programmes follows the Monetary Policy Committee’s (MPC) vote during a special meeting held on March 10.

The TFS for Small and Medium-sized Enterprises will reinforce the reduction of the Bank Rate to the real economy – offering lending at interest rates at, or very close to, that 0.25 per cent. Estimates reveal that the scheme could generate a £100bn in term funding.

The FPC’s decision to cut the countercyclical capital buffer rate to 0% encompasses a key and crucial initiative to support SMEs encountering low working capital – easing the lending process for banks to enterprises.

This will offer up to £190bn of funding to banks at zero cost, on the sole condition it is provided to businesses.

Despite the demand and supply shock caused by the coronavirus outbreak, Roberts explains how the knock-on effect experienced today is far from similar than the 2008 crisis.

“This is the biggest shock that we’ve seen since 2008 crisis. However, it’s not the same. This shock is not involving a freezing of the financial system and it is a relatively simpler shock to supply and demand in the economy because it’s not affecting the financial system. Recovery from this shock might be expected to be much quicker than the 2008 crisis. So yes, it’s a big shock – but no, I don’t think it’s at the same magnitude as 2008.”

The latest insights from MarketFinance reveal that 69 percent of SMEs are encountering low working capital due to Coronavirus affecting supply chains, in which businesses have paid suppliers earlier than anticipated and are now experiencing invoice payment delays.

Over a third of business owners believe they will not survive the Easter period.

If economic conditions worsen, businesses will have to prioritise access to cash flow through financial and operational contingency plans in order to keep growth alive.

The government’s move came ahead of the Budget release, marking the increasing coordination between monetary and fiscal policy.