Government loan scheme needs urgent revamp, says lender
THE Government should move forward with its plans to revamp the Enterprise Finance Guarantee (EFG) loan scheme as SMEs struggle to access finance.
The warning from Absolute Invoice Finance, part of the new British bank, Aldermore, comes after figures show that lending to smaller businesses under the scheme has fallen by 23% in six months from £472m (April to September 2009) to £365m (September 2009 to March 2010).
Absolute is now calling on the Government to accelerate its plans to overhaul the scheme to make it more attractive to lenders.
In May, the Coalition government said it would consider a new major loan guarantee scheme but failed to disclose any details in the recent emergency budget.
Instead, it was announced that the EFG would increase by £200m and set a 20-day target for loan applications until March 2011.
According to Absolute the waning interest in the EFG shows that the big banks still lack sufficient balance sheet strength to lend.
It said it is being approached by creditworthy SMEs who have been turned away by the major high street banks.
The scheme, which is capped at 9.75%, means that the Government guarantees 75% of the value of lending in an individual loan.
If a bank makes 10 loans for £100,000 each it its guaranteed for £75,000 if one loan defaults. However, if several default the bank would be left without any guarantee once £97,500 is reached.
This compares unfavourably with the Small Firms Loan Guarantee (SFLG) scheme, which the EFG replaced.
Under the old SFLG there was no claims cap meaning that lenders were much better protected in the event of defaults.
Dave Jones, regional managing director for the Yorkshire and the North East at Absolute, said: “This is a startling drop in loans under the scheme, which is completely at odds with the buoyant demand for funding from SMEs which we are seeing.
“Month on month, Aldermore is increasing its lending to SMEs, but other banks don’t have the balance sheet strength to do that – an enhanced EFG would really help them out.
He said that the effectiveness of the EFG was limited by new EU rules, which prevented the Government guaranteeing a greater proportion of the loans.
Mr Jones continued:”Any new loan scheme could be hamstrung by EU rules on state aid. The Government should negotiate with our EU partners so that it can design a loan scheme that gives a little more help to those banks that need it.”
