Government launches £20bn small business loan plan

Wednesday, 14 January 2009 12:00

The government has announced a £20 billion scheme to guarantee loans to small businesses.

For a fee, the government will underwrite loans for small firms struggling to raise cash during the downturn, insuring banks against potential defaults.

"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," business secretary Lord Peter Mandelson said.

A working capital scheme will secure up to £20 billion of short-term bank lending to companies with a turnover of up to £500 million, with the Department of Business, Enterprise and Regulatory Reform guaranteeing 50 per cent of this lending.

Additional bank loans worth up to £1.3 billion will be available for small firms with a turnover of up to £25 million under the enterprise finance guarantee scheme. The government will guarantee three-quarters of these loans and will be available through high-street banks.

Finally, longer-term investment will be made available through the capital for enterprise fund. The government will provide £50 million and banks £25 million for smaller businesses who need equity for investment.

Many small businesses rely on trade credit insurance, which is often required by banks to insure against the risk of default.

However, as the risk of going into administration for small firms rises, insurers have been forced to withdraw cover, leaving banks unwilling to lend.

Nick Starling, director of general insurance and health for the Association of British Insurers (ABI), said: "The ABI has been working closely with the government to find a solution to the lack of credit availability in current market conditions.

"This announcement reflects the confidence government has in the trade credit insurance market. We look forward to taking part in further detailed discussions."

However, the Conservatives claim the government has stolen their idea, despite repeatedly ridiculing it.

"We have been calling on Gordon Brown to introduce a national loan guarantee scheme for two months and while the prime minister has dithered dozens of businesses and thousands of jobs have been lost," George Osborne, Tory shadow chancellor, said yesterday.

The Labour plan is an extension of a scheme in the pre-Budget Report, in which chancellor Alistair Darling promised £1 billion to encourage bank lending.

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