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Default cap could be hampering government lending scheme

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The imposition of a cap on the number of defaults could be affecting the success and availability of a government loan guarantee scheme set up to help small businesses.

The Enterprise Finance Guarantee (EFG) is delivered through the banks and other lenders and is aimed at smaller firms that are struggling to raise finance in the recession.

The government hopes to use the EFG to provide an extra £1.3 billion of lending to businesses up to the end of March 2010.

Under the scheme, the government guarantees 75 per cent on individual loans of up to £1 million to businesses with annual turnover of up to £25m. The guarantee can be used to support new loans, refinance existing loans or to convert part or all of an existing overdraft into a loan to release capital.

However, it has been claimed that banks lending through the scheme have to ensure that loan default rates do not climb above 13 per cent.

The figure has been calculated as the average default rate experienced from April 2007 to March 2008 by the loan scheme that preceded the EFG.

But now economic conditions are much worse, and the worry is that the cap will deter banks from using the scheme to lend to small businesses that they might consider as still high risk.

The Department for Business, Enterprise and Regulatory Reform has insisted the cap, which exists to protect taxpayers’ money, will not have an adverse effect on lending.

A DBERR spokesperson was reported as saying: “The overall cap on liability under the Enterprise Finance Guarantee ensures the overall portfolio of lending under the scheme is balanced. It means lenders will need to manage their EFG portfolio just as they would their commercial portfolio and it protects taxpayers from an inappropriate loading of risk by lenders onto the government.”

As further protection, banks are allowed to ask firms for collateral covering the full amount of the loan, although lenders cannot secure the loan against a business owner’s family home.

The details of the restrictions have caused concern among business groups over the viability of the loan guarantee scheme.

Phil Orford, chief executive of the Forum of Private Business, said: “Research carried out by the FPB shows that the EFG is not working to ease the banks’ fears and free up finance sufficiently.”