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Government lending package to support small businesses

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The government has unveiled details of plans designed to provide SMEs with easier access to credit and to help with the cash flow problems afflicting many firms as the economic downturn deepens.

The support package will see the government guaranteeing up to 50 per cent of some £20 billion worth of bank loans to small businesses.

Other steps include special enterprise funds to boost smaller firms which are in urgent need of equity.

Announcing the measures, Lord Mandelson, the Business Secretary, said: “UK companies are the lifeblood of the economy and it is crucial that Government acts now to provide real help to support them through the downturn and see them emerge stronger on the other side.

“We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions. That is why we have designed a package of measures addressing different forms of credit and providing real help for businesses.”

Specifically, the package sets up a £10 billion Working Capital Scheme, securing up to £20 billion of short-term bank lending to companies with a turnover of up to £500 million.

The government said that the Working Capital Scheme is a direct response to the constraint on bank credit available for lending to ordinary-risk businesses. Under the Scheme’s terms, the government will provide banks with guarantees covering 50 per cent of the risk on existing and new working capital portfolios worth up to £20 billion.

As well as guaranteeing working capital credit lines for companies, so ensuring they will not be reduced or withdrawn, the scheme will free up capital which the banks, as a condition of the package, must use for new lending.

Barclays, HSBC, Lloyds TSB and RBS have declared an interest in the Working Capital Scheme, and the hope is that the first £1 billion guarantee tranche should be operational by 1 March.

Also part of the package is the Enterprise Finance Guarantee Scheme.

The Enterprise Finance Guarantee is intended to help smaller, credit-worthy companies which might otherwise fail to secure the funding needed for working capital or investment finance.

The government is to provide £1 billion of guarantees to support up to £1.3 billion of bank lending to firms, with an annual turnover of up to £25 million, which are looking for loans of up to £1 million for a period of up to 10 years.

The guarantee will apply to loans and can also be used to convert existing overdrafts into loans so businesses can free up their current overdraft facilities to use as working capital.

The guarantee will be available through Barclays, Clydesdale/Yorkshire Bank, HBOS, HSBC, Lloyds TSB, RBS/Natwest and Northern Bank. It will become available from other lenders if they wish to apply.

The third part of the package consists of the £75 million Capital for Enterprise Fund, of which £50 million will come from the government and £25 million from the banks (Barclays, HSBC, Lloyds TSB, and RBS).

The Fund, announced in the pre-Budget Report, has been increased from its original £50 million and will convert small business debt into equity.

Managed externally, the Fund will provide long-term capital to businesses which have exhausted traditional forms of finance. Firms can use this capital to invest in and develop their businesses.

Lord Mandelson also confirmed the government is discussing with trade credit insurance providers a scheme to help companies affected by reductions in their credit insurance.

Speaking at a press conference for the launch of the lending package, Lord Mandelson added: “Many companies are struggling to finance themselves because of the crisis in the banks. Their business models are not flawed, but the credit crunch has drastically reduced the amount of capital available, and banks have tightened their lending criteria.

“The package is designed to address this problem directly. The support package we are launching builds on the commitments we made in November’s Pre-Budget report. It addresses the cash flow, credit and capital needs of businesses.”

The Minister continued: “We are offering specific solutions ≠ not a blanket subsidy. We are delivering real help, targeting real needs. It will make a real difference to business, whilst preserving value for money for the taxpayer.

“It addresses the problem at the heart of the credit crunch – credit for viable businesses. UK businesses are the backbone of our economy, so it is vital the Government acts now. We are absolutely determined to do everything we can to support viable companies through this global downturn.”

Most business groups welcomed the announcement.

John Wright, the national chairman of the Federation of Small Businesses, said: “The onus is now on bank branch managers to actively promote this money to its small business customers to ensure their survival and the revival of the economy. The banks now have no excuses and we will be encouraging our members to apply for these funds while keeping a beady eye on the banks through our Bank Watch Scheme to ensure that they are lending actively and fairly.”

David Frost, the director-general of the British Chambers of Commerce, commented: “Businesses are critically in need of cash-flow. Any move to get banks lending again will be seen as good news at this bleak time. A government promise to guarantee individual loans to businesses is not only sensible, it’s crucial.”

However, the CBI cast doubt on the ability of the package to help larger companies.

Richard Lambert, the CBI’s director general, said: “The scale of the problem goes well beyond what the government has announced today. The impact of a damaged banking system on ordinary businesses has reached a critical stage and although the package will undoubtedly help many hard pressed firms it is silent when it comes to larger companies.

“Those businesses at the heart of so many vital supply chains face the daunting prospect of re-financing over £100 billion of credit facilities during 2009. The sense of living on borrowed time is palpable.”