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One of the features of this global downturn has been the focus on credit, with the lack of it driving many SMEs to the brink. Even as people are losing their jobs and companies are going under, the banks retain a tight grip on the purse strings and will not restore lending levels to pre-crunch rates despite numerous calls from the government.
Now it seems that the government has finally reacted with an appropriate response, unveiling a £20bn loan scheme of its own that will provide £10bn for medium-sized companies and the same amount for smaller firms.
With the government offering the security for a fee on a loan the banks should be more willing to ease up funds and pump money back into the small and medium business sectors.
Lord Mandelson, Secretary of State for Business, Enterprise & Regulatory Reform, said that the scheme, with its government-backed guarantees, would enable banks to free up loans to businesses.
“We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions. That is why we have designed a package of measures addressing different forms of credit and providing real help for businesses,” he said.
There have been two criticisms of the scheme so far. The Tories, who wanted a £50bn loan fund, say it doesn’t go far enough; while some say it is increasing the risk burden on taxpayers.
Those representing SMEs have reported over the last few weeks that credit is still hard to come by. The banks are still unwilling to lend and the costs of borrowing for those that are lucky enough to get the money have increased.
In response to the government plans David Frost, director general of the British Chambers of Commerce, said that it expected the banks to start lending immediately following the introduction of the measures.
“If a rapid take-up of these guarantees highlights the need for more financial support then we would expect the government to work with the banks to extend the package,” he said.
The other piece of advice for Mandelson and his department was to keep a watching brief on the impact of the funds, with the prospect of following it up with further measures to stimulate the economy.
“This package is certainly welcome and is likely to address some of the credit restrictions that our members are facing,” said the Forum of Private Businesses (FPB) chief executive, Phil Orford.
“However, it must be followed up by longer-term measures to support small businesses and stimulate the economy, including tax cuts and similar strategies to boost struggling sectors such as the housing and automotive industries,” he added.
Last week the FPB revealed that a survey of its members indicated that a significant portion were being turned down by banks for credit. In addition 40% of those queried said the cost of borrowing had gone up in the last six months.
Eilert Hanoa, CEO of Mamut, which focuses on the SME market, said that what was needed along with credit was advice for companies hoping to get through the tough times.
“The UK and Europe’s small businesses desperately require sound advice and leadership from their governments and trade associations to survive the economic downturn,” he said.
Hanoa added that there had been contradictory advice from both the government and some SME business groups, and as a result vendors had a role to play offering support to resellers.
Since the announcement the reaction from rival politicians in the UK
and the US has been to warn the government that £20bn might not be enough and they could well find themselves having to put more money on the table.