Drop in lending by government business loan scheme

7 July 2010

A business lending scheme backed by the government to ensure that viable small firms have access to finance has seen a marked fall in the number of loans it provides.

The Enterprise Finance Guarantee (EFG) was set up by the previous government to offer small firms the opportunity to secure funding at a time when business credit is being squeezed.

In the second and third quarters of 2009, the banks used the scheme to lend £472 million.

But that figure fell by almost a quarter for the months between September 2009 and March 2010, down to just £365 million.

The Federation of Small Businesses (FSB) voiced worries that not enough had been done to make sure that those banks owned in part by the state provided firms with the credit they require.

The FSB also argued that the cost of the scheme needs to be cut in order to prompt more firms to apply for loans.

Stephen Alambritis of the FSB said: "The EFG is expensive with too many conditions and the marketing of it between September and March was poor. The ebb and flow of it depends on ministers having their eye on the banks."

The EFG is targeted at those businesses that wish to borrow but lack sufficient assets to put forward as security.

The guarantee covers new term loans, refinancing existing term loans, converting existing overdrafts into term loans to meet working capital requirements, and guaranteeing new or increased overdraft borrowing for the SMEs with short-term cashflow difficulties.

Firms that qualify for the scheme - those with an annual turnover of up to £25 million - can apply to borrow anything between £1,000 and £1,000,000.

In the emergency Budget, an extra £200 million was added to the EFG pot, bringing the total to £700 million of guaranteed lending.

There is, however, a cost to the scheme. As well as regular capital and interest payments to the lending bank, businesses pay the government a premium of 2 per cent per annum above base rates on the outstanding balance of the loan.

Mr Alambritis proposed that the promotion of the scheme to businesses needs to be improved while its costs are reduced.

He said: "The extension of the guarantee must be coupled with better marketing.

"With base rates at 0.5 per cent, two points above base rates is enormous. In the context of the talk about unemployment and double dip recessions, it is important that the rate is reduced."