National Loan Guarantee Scheme Will Cut Borrowing for SMEs

A new £40 billion National Loan Guarantee Scheme will bring the cost of lending down by 1 percentage point for small businesses, the Chancellor claimed in his Autumn Statement today.

Alongside the new loan scheme, Mr Osborne also unveiled a £30 billion physical and digital infrastructure improvement programme for the UK, an extension to the rate relief holiday for small firms and measures to help 410,000 unemployed young people get into the workplace.

The Autumn Statement is a ‘mini Budget’ given in response to the twice-yearly Office for Budget Responsibility (OBR) assessment of likely UK economic performance over the next five years. In its latest forecast, the OBR revised its 2012 UK growth prediction downward from 0.9 per cent to 0.7 per cent. This is more optimistic than the OECD’s prediction of just 0.5 per cent UK growth in 2012.

Admitting that the outlook was worrying, the Chancellor promised to “protect Britain from the debt storm in the euro zone through an active enterprise policy for business and lasting investment in infrastructure and education.” Mr Osborne also pledged to reduce Britain’s borrowing from its current level of £127 billion to £24 billion a year in 2017.

The key measures for small businesses

  • £40 billion National Loan Guarantee Scheme for small firms
    The Government will underwrite £40 billion of bank loans to businesses with a turnover of up to £50 million. The Chancellor predicted this will reduce loan interest rates by 1 percentage point. A total of £20 billion will be available initially, with a further £20 billion to be released in the next two years and the scheme will be up and running “within the next few months”. “The important thing is to get credit flowing to Britain’s small businesses,” said Osborne.

  • £1 billion Business Finance Partnership for medium-sized firms
    This £1 billion investment fund will be run in conjunction with private sector partners such as insurance companies. The Chancellor stressed that it would reduce businesses’ reliance on bank funding and, if successful, would be expanded.

  • Extended rate relief to small businesses until April 2013
    Emphasising that the Government’s goal was to give Britain the most competitive tax regime in the G20, the Chancellor extended the existing rate relief holiday, due to come to an end in April 2012, by a year to April 2013. This would mean reduced bills for more than half a million small firms, he said. In addition, larger businesses will be able to defer 60 per cent of their rate increases for the next two years.

  • Rate relief for start-up investors
    From April 2012, anyone investing up to £100,000 through the Seed Enterprise Investment Scheme will receive 50 per cent rate relief and a one-year capital gains tax holiday.

  • £30 billion investment in new infrastructure projects
    Promising a “huge commitment to overhauling the infrastructure of our nation”, the Chancellor announced a Government investment of £5 billion in infrastructure projects up to 2015, along with a further £5 billion for the “next spending period”. £20 billion will also be “unlocked” from two groups of pension funds to provide private investment in “more than 500 infrastructure projects for the next decade and beyond”.

A total of 40 have already been revealed, including the creation of an electric Trans-Pennine Express line between Leeds and Manchester and new railway links between Oxford, Milton Keynes and Bedford.

The Chancellor also promised a superfast wi-fi broadband network in ten major cities, including all four British capitals and superfast broadband for 90 per cent of Britain.

  • £1 billion investment in work and training placements for the young unemployed
    In a bid to reduce youth unemployment, which hit one million in September, the “Youth Contract” will offer an eight-week work placement to up to 250,000 18-to-24-year-olds who have been out of work for more than three months. The Government will also help pay for a six-month job for 160,000 young people who have been out of work for nine months through a £2,275 subsidy to participating businesses. The Youth Contract will come into operation next April.

  • Planned increase in fuel duty frozen
    The 3p increase in fuel duty planned for January 2012 has been cancelled and the proposed August increase of 5p has been reduced to 3p. Rail fares are also set to be capped at inflation plus 1 per cent.

The Chancellor also said:

  • the number of small businesses receiving exporting help from Government will increase to 50,000
  • the Enterprise Finance Guarantee scheme will be extended to all firms with up to £44 million turnover
  • firms in several Enterprise Zones, including Liverpool, the North East and the Black Country, will be given a 100 per cent capital allowance.

George Osborne added:

“All that we are doing today takes Britain in the right direction. It cannot transform our economic situation overnight, people in this country understand the problems that Britain faces. People know that the promises of quick fixes are like the promises of a quack doctor selling a miracle cure.”

Phil Orford, chief executive of the Forum of Private Business welcomed the National Loan Guarantee Scheme and tax breaks for investors, but said the Chancellor had not done enough to encourage competition in small-business borrowing markets.

“The Government should have acted to encourage private lenders too. Small firms need a range of funding options, and equity finance is certainly one of these, but lending at interest remains their preferred route by far.”

The Federation of Small Businesses expressed a similar reservation, saying that guaranteeing the loan books of existing high street banks may serve to reinforce their market position. “We hope that the banks will pass on the lower interest rates to small businesses and that more finance will be available,” said FSB chairman John Walker.

The British Chambers of Commerce called the National Loan Guarantee Scheme “a big shot in the arm for Britain’s real economy”. However, Simon Streat, managing director of credit rating agency Experian’s UK SME business, warned that small firms still needed present a strong business plan and cashflow forecasts to get a loan:

“Small businesses must remember that the onus is still on them to present themselves as a secure prospect for investment.”

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