Government-backed Bank Lending to Small Firms Plummets

Bank lending to small businesses under the Government’s Enterprise Finance Guarantee (EFG) scheme has fallen by 42 per cent in the past 12 months, new figures have revealed.

Research from financial services group Syscap found that the total value of loans offered to small firms under the EFG scheme fell from £742 million to £433 million in the 12 months to 30 June 2011.

The EFG scheme was introduced by the Government in 2009 with a target of lending £1.3 billion to viable businesses with a turnover of up to £25 million. Under the terms of the scheme, banks are advised to lend to businesses they would be happy to lend to commercially, regardless of the guarantee from the Government.

Syscap’s research found that just £93.1 million was made available to new and growing businesses during the three months to June 2011, compared with more than £250 million in the second quarter of 2009.

The report warned that if the trend continued, the Government would fall short of its target of £600 million allocated under the scheme for additional lending between 1 April 2011 and 31 March 2012.

However, a Department for Business, Innovation and Skills spokesman defended the figures, saying that the level of EFG-backed lending in 2009 was “exceptional”, as it coincided with the height of the recession.

“To date, the EFG had supported 15,000 small firms and offered £1.6 billion worth of loans,” he said.  “Overall, demand from small businesses has remained subdued. But there has also been an improvement in the quality of applications for lending from small firms, meaning that normal commercial loans, which are cheaper for small firms, can now be used instead of the EFG.”

The Federation of Small Businesses (FSB) said that banks were failing to promote the EFG because of targets set under Project Merlin ― the Government agreement that set bank lending requirements for businesses. 

“Under the EFG, 75 per cent of the loan is backed by the Government, so only 25 per cent of the loan contributes to bank lending targets,”

said FSB spokesperson Sara Lee.

“There is a concern that banks are perhaps not pushing the EFG as hard as they could. There is also anecdotal evidence to suggest that businesses are not always made aware of the EFG scheme by banks.”

According to an FSB survey carried out in June, one in ten small firms had avoided applying for bank finance due to fears their application would be rejected.

“As a result, many small firms are seeking finance from alternative sources, such as personal savings and credit cards or raising cash through invoice financing,” said Lee.

Government-backed Enterprise Finance Guarantee (EFG) scheme Lending to Small Firms Plummets

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