Government backed lending drops

Overhaul of EFG called for after government backed loans fall by 23% in six months

The coalition government has been urged to improve the Enterprise Finance Guarantee (EFG) after new figures revealed lending through the scheme has dropped.

In his emergency Budget the chancellor announced that the current EFG scheme will be extended by £200m, and set a 20-day target for loan applications until March 2011.

The government said it would consider a new ‘major loan guarantee scheme’ when it was formed in May, but has yet to disclose any further details of how this will work.

Data obtained by British bank Aldermore under the Freedom of Information Act showed that lending to small and medium-sized businesses under the government-backed Enterprise Finance Guarantee (EFG) scheme fell by 23% in six months, from £472m (April to September 2009) to £365m (September 2009 to March 2010).

However, Aldermore said the government should overhaul the scheme to make it more attractive to lenders, arguing that the drop in EFG lending was down to the banks “still lacking sufficient balance sheet strength to lend”.

Phillip Monks, chief executive of Aldermore, said: “This is a startling drop in loans under the scheme, which is completely at odds with the buoyant demand for funding from SMEs which we are seeing.

“Month on month we are increasing our lending to SMEs, but other banks don’t have the balance sheet strength to do that – an enhanced EFG would really help them out.”

According to Aldermore, the EFG compares less favourably to its predecessor the Small Firms Loan Guarantee scheme for the banks. Although the government guarantees 75% of the value of lending in an individual loan, the guarantee is capped at 9.75% of total funds lent out by each bank, said Monks.

He added: “The old scheme which the EFG replaced was much more attractive to lenders as there was no cap on the guarantee.

“With most lenders still nursing bruised balance sheets, the current scheme needs to be improved to incentivise lending. Small businesses need the government to take urgent action on this.”

© Crimson Business Ltd. 2010

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