Four Things The Government Can Do To Stimulate The Economy And Protect Jobs

The Chancellor’s relief package has been heralded as a ‘lifeline’ by many businesses. Yet, for many small limited companies desperate to mitigate the effects of coronavirus, it does not go far enough; or anywhere in-fact. They are not covered by the Self-Employed Relief Scheme and will not qualify for the government’s Coronavirus Business Interruption loan (CBIL). Indeed, despite forming an integral part of the economy, over 2 million businesses have been left in the lurch. 

But it is not just small businesses that have felt the ill-effects of coronavirus. The P2P industry is facing a crisis of liquidity with retail investors and large funds alike not investing. To make matters worse, the P2P industry has no financial services compensations scheme to protect savers, unlike a bank which can guarantee up to £85,000 per account and is unable to draw funds from the Bank of England. As the markets take yet another hit, private investors are running for the hills, jeopardising the future of many SMEs, while transactions in the equity crowdfunding market are at a historic low. 

But, it doesn’t have to be this way. Below are four ways the government can stimulate the economy and protect jobs through alternative finance. 

1. Extend the Coronavirus Business Interruption Loan to P2P sites

The question on many investors’ minds is the security of their finances. Many will question whether it is wise to maintain their level of P2P investment - should they reduce it?

With £3.5 billion lent per year via alternative finance platforms and hundreds of thousands of businesses benefitting from funding, a more pertinent question should be: why in the face of this crisis and with the P2P industry now regulated by the Financial Conduct Authority (FCA), are platforms being ignored by the government? 

The economic landscape can change rapidly. As a result, its essential small businesses have access to fast and flexible funding built around their needs. The reason why the P2P market has expanded so quickly over the last 8 years is because platforms are fast and efficient in their lending processes, utilising the latest financial technology. 

With this in mind, surely, the best way to get money to small businesses quickly is to extend the CBI Loan to P2P lending sites? Under the scheme, the government could provide P2P lenders with a guarantee of 80% on each loan to give investors further confidence to invest through P2P platforms to continue to lend to SMEs. 

With the interest rate cut to 0.1%, savers will be looking for more effective ways to invest their money. There is currently £60 billion in cash ISAs currently earning little or no interest, and on stocks and shares ISAs, investors will have lost at 12% of their capital in this crisis. In an interview with Reaction, Sacha Bright argued that if the government offered the CBIL loan to P2P platforms, “this would kill two birds with one stone”, and would engender the same level of trust as is seen when putting money in the bank- you know you are protected by the financial services protection scheme. This would encourage investment. Indeed, what better way to encourage large amounts of capital to be invested in enterprise via P2P platforms that are not only guaranteed by the government’s CBIL loan but benefit from a higher interest rate which the government has drastically cut for savers. 

2. Include P2P lenders in the Bank of England stimulus

Another, perhaps more long-term way in which the government can protect the P2P industry, and thus the economy, would be to give P2P lenders access to the Bank of England’s stimulus funds so they can maintain liquidity. 

12 years after the first loan was originated on the Zopa platform, peer-to-peer lending has grown to a £9.6bn lending market. But, according to the CEO of Sulte “not all” [P2P platforms] could be expected to make it in the current situation, pointing to the large number of loan originators active on Mintos. The government needs to support not just the banks, but the lenders. 

Already, some P2P funds have suspended trading, with Octopus reporting a high volume of investors trying to withdraw their cash

RateSetter, one of the biggest P2P lenders in the UK with over £800 million on its loan book, is already asking the Bank of England as well as the Treasury, to give it access to stimulus funds. Many small businesses are facing shortages in capital and with rumours of increased demand in lending, without some sort of stimulus there may not be enough liquidity, resulting in lenders cutting back on issuing loans. 

While there is no precedent for such a move, there is proof that such intervention has worked as the British Business Bank has assisted P2P lenders in the past and most recently Assetz Capital, which received £15 worth of funding from British Business Investments in early March. It has claimed that it would now be able to make over £100 million worth of loans with the new capital. However, this type of support should be available for every regulated P2P platform.  Therefore, it can only make sense that if businesses are to maintain liquidity and thus save jobs, then so must the lenders if they are to continue supporting small businesses. 

3. Increase EIS and SEIS allowances to stimulate investment 

As Nextfin has already reported, a key way of stimulating the economy and thus protecting jobs is for the government to encourage those investing in growing businesses to continue to do so. 

The SEIS and EIS have been responsible for almost £20 billion worth of private investors’ capital to create and drive the growth of over 27,000 businesses. But in these challenging times, the schemes must go much further to attract even more private investors to help keep businesses liquid. 

In my last article, I suggested that as SMEs struggle with shortages in cash flow, a way to stimulate investments would be for the government to temporarily raise the income tax relief credit to 50% for EIS and 70% for SEIS, and also increase SEIS investment threshold to £250,000 and £5 million on the EIS.

Doing so would potentially unlock millions of pounds of extra funding which start-ups can use to fund their survival and allow for potentially hundreds of businesses to crowdfund and further increase revenue. 

Equity crowdfunding has gone from providing £500 million worth of capital funding to businesses last year and we have seen a 75% drop in activity in the last week. 

So, if the government were to increase the EIS and SEIS thresholds and tax relief credit, more money becomes available for businesses. Instead of having to lay off staff businesses can hire more employees, thus creating jobs while the government gets its money back through tax revenues. This higher level of tax relief will encourage the rich to invest in enterprise And as we demonstrated in our hypothesis, the money is returned to the government via tax revenues over three years. 

4. Support small limited companies with a payout of £2500 per month

We have seen that despite Chancellor Rishi Sunak announcing his scheme would support 95% of businesses in the UK,  government stimulus packages exclude an integral part of the self-employed labour market: small limited companies. 

Indeed, the scheme does not extend to owner-managers of companies that pay themselves through dividends. According to the Treasury, these companies are ineligible because it is allegedly impossible to know whether the dividends arise from their work or from passive investments. As such, the government is reluctant to subsidise those with extensive earnings. 

In essence, the exclusion of owner-managers of small limited companies will be of detriment to the UK economy. As we have reported, there are 2 million small limited companies in the UK. That accounts for 34% of all UK businesses. 

Because owner-managers cannot claim the 80% self-employment relief; nor the 80% furlough employment relief unless they were considering making themselves redundant, we call on the government to pay a straight £2500 per month, or match the provisions of the Self-Employment scheme based on dividends for directors that are drawing less than £50,000 per year. While we acknowledge this will incur a cost to the Treasury, it is important that the cost will be far less than the expense of mass unemployment. 

We must remember that small limited companies, despite using dividends as a method of payment, make a huge contribution to the economy through job creation and taxation, and it can only be fair that this contribution is acknowledged with government protection. 

Authors: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed. Nextfin is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site. 

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