Budget 2012 reactions: The National Loan Guarantee Scheme

The government has pledged £20bn of guarantees on banks' unsecured loans to businesses. But what does the business community think?

Prior to the Budget, the government announced its latest loan scheme designed to enhance access to credit for small and mid-sized businesses. The National Loan Guarantee Scheme (NLGS) will provide £20bn of guarantees to banks on their unsecured debt, in return for a fee.

Qualifying companies – those with turnovers of up to £50m – that access NLGS loans will be entitled to a discount on that loan of one percentage point on the interest rate offered by the bank.

The minimum term loan businesses can take will be a year and banks will follow their standard lending procedures. Participating banks include Barclays, Santander, RBS, NatWest, Lloyds TSB, Bank of Scotland, and, in principle, Aldermore. So is the scheme set to solve access to credit for companies looking to grow – or will it be a damp squib? Entrepreneurs, investors and other commentators gave their verdict:

Stephen Welton, CEO, the Business Growth Fund (BGF):

“We are working closely with the banks to unlock more credit for SMEs, whilst also ensuring a well capitalised and properly funded long term balance sheet for our investee companies. The Loan Guarantee Scheme supports our view that now is the right time to invest in these businesses.

Stewart Baird, founder of small business investor, Stone Venture Partners:

“Cheap money will not spark the economy. Money in the right places will spark the economy. One percentage point is neither here nor there. It’s bizarre that everyone except the government is able to see that. You can bet your bottom dollar that the smallest companies with the biggest growth potential won’t get to see any of this money.

“The banks remain highly risk adverse and this loan guarantee scheme will not change that. Credit easing is easy, credit giving is what matters. Companies need finance full stop, not just cheaper finance. To me, this scheme feels as if it’s mollycoddling the banks rather than getting money to the high growth businesses that will drag the economy out of the hole it’s in.”

James Caan, founder and CEO, Hamilton Bradshaw Private Equity:

“It is the vibrant SMEs business sector that will be able to supply the new jobs we need to kick start the economy. For small, energetic companies to grow quickly and create new employment they need financing at competitive levels and the chancellor’s National Guarantee Scheme is a significant move in the right direction.”

Jeremy Waud, managing director, Incentive FM:

“This completely misses the point – SMEs aren’t too worried about interest payments – the key problem is actually getting a loan in the first place as banks want guarantees and are highly risk averse. The government would have been better to address the issue of security – thereby making banks more likely to give loans.”

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Sophie Murra, manager, Sharemark:

“The support offered in today’s Budget was less than expected. Our interest lies in whether the National Loans Guarantee Scheme (NLGS) announced yesterday will be enough to help struggling SMEs in this difficult climate. Through our network of smaller companies we are aware of a lot of trepidation amongst SMEs who are anxious about coming forward, even for existing fundraising initiatives. We hope SMEs will have the confidence to utilise the opportunity the NLGS intends to provide and ultimately boost, economic growth.”

Edward Winterton, executive director, Bibby Financial Services:

“The National Loan Guarantee Scheme (NLGS) is not addressing the real issue as we see it. Fundamentally, the NLGS will only serve to give businesses already seen as ‘acceptable’ for funding by the banks access to cheaper cash. The government needs to acknowledge that it is not necessarily bank funding that SMEs want – we know from our own study of SME funding that only 13% of small and medium-sized businesses even applied for a bank loan in the first quarter of 2012.

“Businesses do need clarity on the “alphabet soup” of schemes, as the BIS Taskforce report put it, promoted by the government from the EFG, to the EIS, the NLGS and even Project Merlin. Our study from Q1 this year has also revealed that only 4% of SMEs have applied for a government loan in the last 12 months. This should surely give a signal to Mr Osborne that the current offering of funding available to SMEs through the government’s schemes is not painting a picture of accessible, relevant, and flexible credit and is simply not working.”

Stuart Morris, lecturer at the Centre for Entrepreneurship, Henley Business School:

“The National Loan Guarantee Scheme only helps those businesses that can already access bank loans which is a minority of SMEs. It reduces their interest rate by 1% whilst pushing the risk onto the government. It is likely that the net effect of this measure will be to increase the banks’ profits by the amount that the government ends up paying when some of the companies default.”

Phil Orford, chief executive, The Forum of Private Business:

“On finance, the Forum is in principle welcoming the government’s National Loan Guarantee Scheme (NLGS), a £20bn ‘credit easing’ initiative to reduce bank lending costs – but warning that the smallest firms in most need of affordable funding must benefit firm the scheme, amid concerns it is more relevant to large companies and medium-sized businesses – a similar criticism levelled at the £1bn Business Finance Partnership scheme for mid-cap firms.”

Paul Aitken, CEO, borro:

“While we welcome the government’s promises for administrative savings for small businesses and the National Loan Guarantee Scheme (NLGS) announced to support small business lending from banks, it is clear SME leaders have continually failed to access the levels of finance expected from our biggest institutions.

“borro research found that a quarter of SME owners (24%)  say they have missed out on a growth opportunity due to a lack of accessible finance, while one in 10 have considered closing their business because of the inability to raise cash. Little wonder then that people are increasingly seeking viable alternatives for small business lending.”

Peter Gradwell, managing director, Gradwell:

“Regarding the much-trailed announcement on lending, my view is that while bank lending is quite cost-effective, they will only lend on their ‘normal commercial basis’, so if a business like we once did, had a weak balance sheet, and you’re looking for a lot of money to make a big change/start something then it is too high risk for a bank, and they won’t fund it.

So, anything that government does to reduce the risk to the bank in the event of default by the customer (which is currently very important for banks) and keep the cost down (important for business) is good, but it doesn’t improve the desire of the banks to ‘invest in small business’ – because ultimately investments in business plans are always risky.”

Tracy Ewen, managing director, IGF:

“Whilst we welcome any government initiative to help the SME market, we must ask ourselves, will the National Loan Guarantee Scheme actually succeed, especially when Project Merlin failed? The majority of the SME market doesn’t fall into the £50m turnover category and, as a result, the scheme doesn’t look like it is aimed at the family owned business or the micro enterprise. Importantly, this is the area that has been most affected by the economic strife and which most needs the government’s attention.”


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