Small Business set to Benefit from Loan Guarantee Scheme

Banks that demonstrate a willingness to increase their lending to small and medium sized organisation will reap the benefits of a new government scheme aiming to get credit flowing again to these important businesses.

Struggling SMEs have been placed at the centre of measures to get the economy moving again, the government has set aside £1 billion to invest in these companies and announced a new loan guarantee scheme to help them borrow more easily.

The loan guarantee scheme will involve £20 billion of bank funding being underwritten by the government over two years, in order to provide new loans and overdraft facilities to businesses. There is the potential to extend this scheme by another £20bn if the desired effect is not achieved.

The scheme is chiefly aimed at businesses with turnover up to £50 million, which have been suffering lately as the result of difficult credit conditions. The government guarantee will reduce the risk to lenders and allow them to offer cheaper loans to small and medium businesses. According to Chancellor George Osborne the scheme should reduce the interest charged to small companies by 1 percentage point, which would mean that a company borrowing £5 million would save £50,000.

Whilst feedback is generally positive about the government’s efforts to support small businesses, there has been some concern that guaranteeing loans given by high street banks would strengthen their position too much and stifle competition. A spokesman for the Federation of Small Businesses said “the Government must go further to promote the emergence of alternative forms of finance and greater competition in the banking sector.”

In response to the FSB’s comments the Treasury has stated that it is exploring ways to expand non bank lending – in the form of bond markets and other financial products, to benefit smaller organisations..

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