Mandelson forced to defend Enterprise Finance Guarantee Scheme

   

Lord Mandelson has been forced on the defensive following recent criticism of the Enterprise Finance Guarantee Scheme. The Business Secretary says that over £1m per day has been guaranteed under the scheme since its launch. However, critics of the scheme point out that not only is the amount of EFG lending 'capped' due to EU rules, but normal bank lending is continuing to fall at a rapid rate.

What is the Enterprise Finance Guarantee Scheme?

Launched in mid-January 2009, the scheme aims to help credit-worthy companies which might otherwise not be able to access the finance they need for working capital or investment finance due to the current tight lending conditions.

Under the EFG scheme the government will guarantee 75% of any loans made, with the bank covering the remaining 25%. The guarantees will mean that the government, or taxpayers, will pick up three-quarters of the the tab for any bad loans.

The guarantee can be used to support new loans, refinance existing loans or to convert part or all of an existing overdraft into a loan to release capacity to meet working capital requirements. The old Small Firms Loan Guarantee Scheme has been suspended.

23 lenders, including all the major high street banks, are registered to offer the scheme.

You read more in our overview of the EFG scheme.

Mandelson claims EFG scheme a success

According to Government reports, over 400 loans have already been offered under the EFG scheme since it was launched last month, with demand increasing rapidly as the weeks go by.

The Government says it expects to make over £1.3bn available to smaller companies during the year.

Lord Mandelson commented:

"Inevitably it takes time for schemes to take effect but the amount already lent, in only a matter of weeks, is good news for business. We will continue to work with banks to ensure individual branches are offering the guarantee and will continue to promote the scheme to small businesses across the country."

Is there a 'cap' on EFG scheme lending?

Despite the Government's marketing effort, leading business pressure group, the Forum of Private Business (FPB), has revealed that there is a 'cap' on the EFG scheme. The organisation is concerned that this restriction means potential Government losses from the scheme are limited to a mere 10% – a fraction of the 75% guarantee for each loan pledged under the EFG. This is likely to be the major reason behind the banks' continued bracketing of many small businesses as 'high risk' propositions.

The cap is thought to relate to the European Union's 'State Aid Rules', which limit the level of finance member states can plough into financial institutions out of fears of distorting competition.

Bank lending falling

The FPB also points out that these figures should be read in context with the fall in lending experienced by small businesses.

According to the British Bankers' Association (BBA), in the fourth quarter of 2008 alone, total bank lending dropped by £159 million. At the present rate of lending, the FPB says that it will take over six months to make up this shortfall. Although the Government has said that 400 loans have been offered under the EFG, research carried out in the FPB's Referendum survey of members in December shows that 400,000 smaller employers will need to renew or increase their lending agreements by the end of March 2009.

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