National Loan Guarantee Scheme

Chancellor George Osborne has announced that he will be backing up £40bn in credit easing loans (The BBC, Sunday 27th November 2011) The new plan will be known as the National Loan Guarantee Scheme.

Under the scheme, the government will initially back loans to small businesses to the tune of £20bn but the figure could rise to around £40bn. The Chancellor has made it clear that the Government will not itself actually be providing this money directly to small businesses but through underwriting…

"These are guarantees, we are not borrowing this money, we are underwriting the loans that are being made."

By backing at least £20bn worth of loans to small businesses the banks will have part of their lending guaranteed and should thereby be able to offer lending to small businesses at a lower rate, thus stimulating small firms’ borrowing and therefore easing their cash flow.

As an example, the BBC stated that a small firm with a £5m business loan at a typical interest rate of 5% might instead have a 4% repayment rate saving the company £50,000 per annum in interest repayments.

Named in a Tory party manifesto before the last election the National Loan Guarantee Scheme is similar to the previous Labour government’s credit guarantee scheme set up by Alistair Darling in the wake of the credit crunch and the European Investment Bank’s £450 million of discounted small business loans announced earlier this year.

The National Loan Guarantee Scheme is the first of three proposals from the Chancellor alongside two other proposed methods, one whereby the government takes a stake in an investment fund to medium-sized businesses, the other where businesses sell bonds, or company IOUs, to the market.

Speaking to the Press Association a Treasury spokesperson said that the schemes were a "game changer". This is all assuming that the banks stick to the government’s insistence that the loans are ring-fenced for small businesses and that the reduced rates are cuts of around 1%.

The National Loan Guarantee Scheme is expected to be announced in the Chancellor’s Autumn statement on Tuesday.

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