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July 20, 2021

RLS benefits sustainability and innovation: Paragon’s Phillipou

By Alejandro Gonzalez

Paragon Bank, a UK lender and provider of asset finance, recently conducted a survey with more than 1,000 SMEs that revealed the vast majority are feeling positive about business recovery as Covid lockdown rules are lifted across England and the rest of the UK. John Phillipou, managing director for SME lending at Paragon Bank, considers the survey findings and pays tribute to the Government’s Recovery Loan Scheme (RLS)

Our survey findings have revealed that more than nine in ten SMEs (92 per cent) predicted positive business outcomes post-lockdown, and more than half (54 per cent) recorded that their turnover either matched or exceeded pre-pandemic performance.

The Government schemes have certainly played a key part in supporting SMEs as they recover following Covid-19. As of the end of May, 12 per cent of SMEs had already used the Recovery Loan Scheme (RLS), while a further 23 per cent said they planned to use it in the future, which means that more than one in three SMEs will likely utilise the scheme in total.

The role of RLS

There are a number of things that SMEs need to consider as they make their post-pandemic recovery plans. They should first consider having access to a selection of funding options that exist in the market. It’s key for business owners to be educated on exactly what type of solutions are available to them, both through Government schemes such as the RLS and beyond those, in order to help guide their decision making.

One of the biggest benefits of the RLS is that it has relatively simple eligibility criteria, which has helped both lenders and borrowers. The two foundation stones for the scheme are that an RLS loan should either create cheaper funding for the client or facilitate loans lenders would struggle to fund as part of their everyday ‘business as usual’ lending policy.

The latter is a great benefit for two reasons. Firstly, it allows us to lend against technologically advanced, innovative assets that will help power SMEs’ recovery forward, but that isn’t always ‘tried and tested’ to meet our usual criteria.

Secondly, it means we can now lend to customers that may not meet our credit risk requirements because of the short-to-medium term impact of Covid-19 on their business, helping those businesses to recover post-pandemic.

John Phillipou, MD for SME lending at Paragon Bank

RLS: sustainable growth and innovation

We certainly anticipate that more sustainable and innovative ‘green’ assets are going to be funded – for example, the use of electric or hydrogen cell technology and other similar initiatives. Historically, those assets can be challenging to fund over the long term as there is an unknown element to how they perform over time. Schemes like RLS can help lenders adjust their risk appetite to facilitate green lending better in the future.

Another emerging trend is around funding the technological part of the asset, not just the mechanical piece. When agreeing on a loan against an asset, banks look carefully at the value of the equipment involved based upon resale data.

As the market goes more digital, the value of the assets is transitioning from pure ‘metal’ costs towards the softer ‘system and interface’ costs. This upgrade in technology means that banks can’t easily pin a security price, which means lending against digitally powered assets has historically been a challenge.

With those assets, software is the most expensive thing but is currently valued at zero by many lenders. RLS will give lenders the opportunity to ‘lend and learn’ and review processes and lending criteria for the long term. In that sense, RLS has the potential to empower and support the path of digital transformation amongst UK SMEs.

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Recovery Loan Scheme for UK businesses impacted by Covid-19

Covid-19 Business Recovery Loan Scheme: a primer

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