Will government SME loans work?
Article Date: Feb 18 2009
Is the government pot big enough?
The first small and medium-sized enterprises (SMEs) are starting to reap the benefits of the government’s £20 billion loan guarantee scheme, announced last month by Peter Mandelson. But is it too little, too late, asks Sally Goodsell, CEO of regional investor Finance South East.
Let’s look at the facts. The current lack of credit means that businesses are finding it difficult to secure bank funding and even renew existing loans. Research from the Forum of Private Business shows that in the last quarter of 2008 one-third of growth businesses sought finance. Almost half of these were either partially or completely rejected by UK lenders.
Given the huge hit taken by banks in recent months it’s easy to see why they’re reluctant to lend. The new government scheme hopes to get credit moving by removing the risk associated with loan defaults should businesses go bankrupt.
The scheme’s ability to stimulate recovery may well depend on whether individual SMEs can find good business opportunities in the new climate. These are loans, not grants, and they can’t rescue an enterprise struggling with its core strategy. For ventures incapacitated purely by the lack of credit, however, the scheme could be useful.
Although £20 billion sounds like a lot of money, it’s important to remember that this initiative is open to businesses with sales of up to £500 million. That means some fairly large chunks of cash will be made available to organisations at the top end of that band, leaving less for the rest.
The Enterprise Finance Guarantee, which replaces the existing Small Firms Loan Guarantee, has more modest funds of £1 billion (set aside to guarantee £1.3 billion of lending) but is reserved for companies with turnover of up to £25 million. This scheme can be used to convert an overdraft into a loan, freeing up the overdraft facility for other working capital demands.
That sounds promising, but entrepreneurs need to be reassured that banks are actually willing to lend rather than simply making promises that come to nothing. The wider problem is that government announcements about SME funding provide hope for entrepreneurs struggling to access finance – but when banks are approached for a loan they are still unwilling to lend.
Many applications could be held up by a lengthy form-filling process at banks. SMEs cannot afford to spend valuable time completing an application that only ends up getting rejected due to “incomplete paperwork”. This is an issue that needs to be addressed so that much-needed finance reaches SMEs now rather than in several months’ time.
It’s always heartbreaking to see good enterprises going under purely for want of credit, so I’m delighted that a few companies have started to benefit from the government’s efforts to boost business finance. That said, these schemes rely on the co-operation between banks and government. Banks should be actively promoting this scheme to their business customers and need to be watched closely to ensure that they lend actively and fairly.
Finance South East offers SMEs in the South East of England access to funds and private investment networks. In collaboration with SEEDA, the organisation is helping established SMEs unable to obtain finance with Transition Fund loans of up to £150,000.
