Government announces plans to guarantee business loans

Posted on 14 Jan 2009 by The Manufacturer

Government has today announced it will underwrite £20 billion worth of loans to small businesses following pressure to do so by quangos and business groups.

The deal will see the government foot the bill when companies default on loan payments. It includes three directives as part of the package:

The government will be guarantor for £20 billion worth of short-term loans, using £10 billion working capital, for companies with a turnover of up to £500 million;

• An additional £1.3 billion worth of loans secured for companies with a turnover of up to £25 million; and

• A capital fund of £75 million (£50 million from the government, £25 million supplied by the banks) for urgently required equity

Peter Mandelson unveiled the scheme as Secretary of State for Business, Enterprise and Regulatory Reform. “UK companies are the lifeblood of the economy,” he said, “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.”

Under the first scheme, the government will make itself accountable for 50 per cent of a business loan to a company while the bank will remain the underwriter for the other half. The second scheme makes loans of up to £1 million available to companies over a period up to 10 years and the government will guarantee £1 billion of £1.3 billion’s worth of these. This second facility includes the capacity to turn overdrafts into loans. ‘Viable companies’ with high levels of existing debt can utilize the third scheme with a slice of the £75 million.

EEF, the manufacturers’ organisation, called for the move as part of its six-point plan, revealed on Monday, which advised direct state action to kick-start the economy.

EEF Chief Economist Steve Radley said of today’s announcement:

“This package goes some way to kick-starting credit markets and helping business access the finance they need. By underwriting loans, the government scheme could provide welcome breathing space for firms faced with cash flow problems after credit markets dried up. With a framework soon to be in place, businesses will be looking to Banks to follow the government’s lead by restarting the flow of finance.

“But as business waits for credit markets to thaw, government needs to ensure that vital parts of the supply chain are not lost amidst this maelstrom and quickly put in place support for trade credit insurance and measures to protect skilled jobs.”

Shadow Chancellor George Osborne said today’s announcement is a “pale imitation” of a Conservative policy touted a few weeks back. The Tories had proposed guaranteeing £50 billion.

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