Fintech Bank Starling Takes Advantage Of Government-Backed Loans To Meet Lending Commitments

Starling, the online-only fintech challenger bank is to issue £600 million of government backed loans to small UK-based businesses. Last year the bank committed to lending £913 million, just shy of £1 billion, when it applied for an official grant to help grow its small-business lending unit. The loans are to be made by 2023 and the promise resulted in the award of a £100 million grant.

It was presumed at the time that the remaining £813 million in small business loans would be issued at the young bank’s own risk. However, Starling has taken advantage of the government’s ‘bounce back loans’, initiative designed to open up the funding taps for otherwise healthy companies hurt by the Covid-19 pandemic lockdown. Bounce back loans are issued by private banks but guaranteed by the government, so there is no risk to the lender.

Starling yesterday announced that it has now either lent or committed to £600 million in bounce back loans and ‘coronavirus business interruption loans’(CBILS), a second category 80% guaranteed by the government. While the idea of the government guarantees is designed to mean businesses have access to the capital they need to recover from the financial blow of shutting down or limiting activities during the lockdown, there will be debate over whether these loans, which are essentially risk free for Starling, should count towards its grant-securing commitment.

Starling disclosed the lending data in its quarterly report to Banking Competition Remedies, a Treasury body created to distribute and oversee the small-business lending grants. The grants themselves were funded by the Royal Bank of Scotland and represent one of the penalties, or conditions, imposed upon it as a result of the tax payer-funded rescue package that saved it from collapse during the last financial crisis. Starling’s £100 million grant was second in value only to one awarded to Metro Bank.

One of only a handful of fintech lenders accredited to participate in the Bounce Back and CBILS schemes, competitors and market analysts are surprised the young bank is being allowed to count the government-guaranteed loans towards its lending commitment. Starling had lent only a little over £1 million to small businesses over the first quarter of the year before the schemes were introduced.

The fintech bank has also announced that it has raised £40 million in new investment just three months after investors injected another £60 million. Investors were presumably encouraged by the fact £600 million in loans carrying almost no business risk had just been delivered.