Government schemes fail to lend hand to SMEs

Flagship government lending schemes are not delivering the goods for small business, says Syscap

Government schemes fail to lend hand to SMEs

Lending to small businesses under the government’s Enterprise Finance Guarantee (EFG) scheme has fallen to a new record low, according to independent finance provider Syscap.

The EFG scheme was brought in to stimulate economic growth in the aftermath of the financial crisis by encouraging banks to lend to SMEs with an annual turnover of less than £25m. 75% of an EFG loan is guaranteed by the government. 

Skysap said that the total value of loans offered under the EFG scheme dropped by 26% in the final three months of 2012 compared to the previous quarter, falling to just £70.7m, a reduction of 9.1% on the same period in 2011.

From its peak in the third quarter of 2009, the total amount of new loans provided through the scheme has fallen by two thirds.

The government’s other key lending programme, the Funding for Lending Scheme, has also failed to achieve its ambitions, as lending to small businesses under this scheme fell in every quarter of 2012, according to the Bank of England.

In the last quarter of 2012 alone, net lending to businesses fell dramatically, by £4.5bn.

In addition to the drop in lending to SMEs, interest rates on loans of under £1m to businesses have soared to 4.22%, their highest level since December 2008.

Since the Funding for Lending scheme was introduced in July 2012, interest rates on SME loans have actually risen by almost 0.5%.

Philip White, chief executive officer of Syscap, said: “We now have two major schemes aimed at getting finance to small business that are not achieving as much as was hoped.

 However, with the risk of a triple dip recession still looming, we think it is important that the government should not give up just yet on using the EFG and Funding for Lending to get more money to the businesses that need it.

“In our view the schemes’ performance could be turned around by enabling a wider range of lenders to utilise them: extending the EFG scheme to leases and opening the Funding for Lending Scheme to asset finance providers that are not bank-owned.

 As well as drawing on the leasing industry’s balance sheets, this would also mean the schemes could leverage a wider range of relationships with SMEs including both the independent finance providers’ direct customer base and their relationships with brokers.”

This worrying news comes as the government announced its second round of funding under the Business Finance Partnership (BFP), with three new lenders pledging to make £70m available to SMEs.

Given the disappointment that SMEs have experienced thus far with EFG and Funding for Lending, it would be nice to think that they could see a bit more success from the BFP scheme.

We will reserve judgment for now and leave it up to the powers that be. 

Adam Pescod
Adam Pescod

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