Enterprise Finance Guarantee cut won’t Damage Small Business Loans, says FSB

The Government’s decision to reduce its exposure to defaulted bank loans under the Enterprise Finance Guarantee (EFG) scheme, shouldn’t affect small firms’ access to bank finance, the Federation of Small Businesses (FSB) has said.

Under the EFG, the Government guarantees the loans that approved lenders make to small businesses. The scheme allows small firms with few assets to access lending. But in a climate with fears of bad debt, the Government is reducing its guarantee to the banks for larger loans from March 2011.

The FSB’s comments followed claims by the chairman of small business at the Royal Bank of Scotland (RBS), Peter Ibbetson, in The Telegraph, stating that reducing the Government’s exposure from 9.75% to 9.225% after the first £1 million of lending would affect the ability of smaller lenders to use the Enterprise Finance Guarantee scheme.

According to The Telegraph, RBS approves 41% of loans under the EFG scheme and Lloyds approves 31%, with the remainder allocated to 25 other approved lenders, including Community Development Finance Institutions.

FSB spokeswoman, Sara Lee, said that the Government’s reduced liability will increase the risk for smaller lenders after they have lent their first £1 million, but that most small businesses borrow from the main banks.

“It won’t really affect that many small businesses, because most small firms go to the main high-street clearing banks, which make up 95% of the market. The cap reduction is less risky for them than for smaller lenders. A number of other smaller banks and credit unions offer the EFG and they will be slightly more exposed, but they don’t have as many small business clients.”

However, a Department for Business, Innovation and Skills (BIS) spokesman said the Government was increasing its guarantee from 9.75% to 15% of each approved lender’s first £1 million in loans, and then reducing its guarantee to 9.225% for any lending provided under the scheme after that. The cap change will apply to lenders of all sizes.

“Smaller lenders in more deprived areas are not using their full allocation of guarantee, as they are concerned that more than 9.75% of their loans will default, so we decided to increase the percentage of loans that we guarantee within the first £1 million, to encourage them to lend more,” said the BIS spokesman.

The spokesman added that there was no evidence that the cap changes would damage lending to small businesses.

“The reduction of the cap after the first £1 million is a small drop for the bigger lenders which is not likely to have a significant effect on the amount that they lend. There is no drop-off overall, and we don’t believe it will discourage lenders or damage small firms.”

Enterprise Finance Guarantee cut won’t Damage Small-business Loans, says FSB

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