Government SME loans success depends on changes to bank lending practices, says expert

Chancellor George Osborne announced a National Loan Guarantee Scheme aimed at lowering the cost of bank loans for SMEs. Under the Scheme the Government will guarantee up to £20 billion worth of loans made by banks to companies with an annual turnover of under £50 million.

But the factors currently preventing SMEs from having access to bank loans will still be in place and change will not come unless the Government accepts more risk, one expert said.

"How the National Loan Guarantee Scheme is implemented is the key question, given that previous attempts to stimulate lending have been hindered by the requirements of the banks’ internal credit approval procedures," said Matthew Heaton, a banking law expert at Pinsent Masons, the law firm behind Out-Law.com.

"The scheme will see the Government guarantee the borrowings of SMEs and unless it demands a relaxing of credit requirements by lenders, and therefore accepts the resulting increase in risk and likely defaults that the taxpayer will be obliged to underwrite, it will be interesting to see how this will stimulate lending," he said.

"The Government will allow participating banks to raise up to a total of £20 billion of cheaper funding over the next two years under a government guarantee, provided they pass through this lower cost of funding to smaller businesses," said the Government's Autumn Statement (98-page / 3MB PDF), in which it outlined revised spending plans.

"In many cases, this will lead to a reduction of up to one percentage point on the cost of the business loan. The scheme will focus on new loans and overdrafts, to help increase the supply of credit in the economy," it said. " In order to qualify for the guarantees, banks will have to show that they are passing through the benefit of the guarantee to cheaper loans."

The Government has put the scheme in place because of ongoing economic turmoil across the world and in Europe in particular, and because of the disproportionate effect it said this is having on smaller firms.

"Shocks to confidence and credit conditions stemming from the euro area crisis are affecting the UK recovery," said the Autumn Statement. "These problems are most acute for smaller and mid-sized companies that are most reliant on the banking system for finance."

Alastair Lomax, an expert in restructuring law at Pinsent Masons, said that the Government was addressing the right issue, but that its actions may not provide a complete solution.

"Credit conditions continue to be extremely difficult for small and medium-sized businesses. The government’s announcement is therefore welcome news. However, this only deals with the supply side of the equation," he said. "The bigger challenge will be to the stimulate conditions for growth. Growth and confidence are the missing ingredients which will promote the demand from SMEs for the funding being put forward. Without them, too many SMEs will continue to tread water and remain vulnerable to the threat of a double-dip."