Understanding the Dynamics of UK Covid-19 SME Financing

The scale of the UK government’s response to the Covid-19 crisis after the first lockdown in March 2020 was unprecedented. For the business sector two financing schemes were particularly relevant, the Coronavirus Business Interruption Loan (CBILS) and the Bounce Back Loan (BBLS). Both were designed to support the capitalisation of businesses through this difficult trading period. In this paper we use data covering the first two quarters of the Covid-19 crisis to explore the dynamics of SME financing and in particular the role of government support schemes. Our findings show that 92.1% of all debt funds provided in this period were backed by the UK government which compares to less than 5% under normal circumstances. We find that the demand, supply, and government share of SME lending increased from Covid-19 quarter 1 (April to June 2020) to quarter 2 (July to September 2020), that micro and small businesses had the highest demand for loans, and that better-performing firms were more likely to receive loans. Further, in a world where more loan requests than ever were granted the government share of this pool of loans had a different risk profile than the small pool of non-government backed loans.