Plans revealed by Chancellor George Osborne to hand out up to £40 billion in state-backed loans to small businesses in a bid to unclog the flow of credit have been welcomed.
The credit easing programme will initially see £20 billion made available to small businesses over the next two years under a National Loan Guarantee Scheme and an additional £1 billion to mid-sized firms under a Business Finance Partnership.
The Chancellor said it would allow small and medium-sized enterprises (SMEs) to borrow at the same “hard-won” low-interest rates at which the Government currently borrows as a result of the UK’s perceived status as a safe-haven from the turmoil in the eurozone.
Mr Osborne said: “No government has attempted anything as ambitious as this before. With the strain on the financial system increasing, the important thing is to get credit flowing to Britain’s small businesses.”
The move, which will see the Government and Bank of England allocate funding to banks based on how much they boost lending to firms, was seen by Labour as an admission that the Project Merlin lending agreement between the Government and Britain’s banks failed.
But some business leaders backed the move as a welcome boost to Britain’s struggling companies.
John Cridland, CBI director-general, said: “The National Loan Guarantee scheme is a necessary pre-emptive strike to safeguard bank lending to SMEs. With the pressure on bank balance sheets, this is practical and immediately available help.”
Meanwhile, British Retail Consortium director general Stephen Robertson said: “Where a lack of access to available and affordable lending is small businesses’ barrier to investment, this will help.”
The Treasury has set a ceiling of £40 billion for the measures, so the lending to small businesses could increase beyond the first two years.
The National Loan Guarantee Scheme will issue new loans and overdrafts to businesses with a turnover of less than £50 million.
The Chancellor said the scheme will trigger reductions of 1 percentage point in the rate of interest being charged to companies, so a business facing a 7% interest rate to get a £5 million loan could instead see its rate reduced to 6% and their interest costs fall by up to £50,000.
Mr Osborne added: “We’re using the credibility we’ve earned in the international markets to help our domestic economy.”
The Treasury previously said the new policy would not increase the state deficit because the Government will be obtaining assets in return for its investment.
However, reports have suggested the Treasury will not be allowed to offset the new assets when it comes to calculating Britain’s total net debt, potentially boosting it by tens of billions of pounds.
