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Government extends small business loan guarantee scheme

More businesses are now eligible for a support scheme which allows smaller companies without the credit history to secure a normal bank loan to access Government-backed funding, the Department for Business, Innovation and Skills (BIS) has announced.16 Feb 2012

The Enterprise Finance Guarantee (EFG) is now available to businesses with an annual turnover of up to £41 million seeking a maximum of £1m in loans. The new threshold, up from an initial turnover limit of £25m, means that eligible businesses that meet the European Commission's criteria for small and medium enterprises (SMEs) will be able to take advantage of the scheme.

Four new lenders – Metro Bank, Hull Business Development Fund, Black County Reinvestment Society and MSIF - have also been accredited to offer loans under the scheme, and the Government will be accepting applications from new potential lenders next month.

The EFG makes it easier for eligible small businesses who would otherwise struggle to get credit from banks to obtain loans. Under the scheme the Government provides an accredited lender with a guarantee for 75% of the loan's value, for which the business borrowing the money pays a premium. It is part of a range of credit easing measures the Government makes available to small businesses which lack ready access to capital markets.

Business Minister Mark Prisk said that the scheme had already supported over 16,000 businesses. The Government has committed to guaranteeing £2 billion in loans over the four years to April 2015, he said.

"If businesses are to start, thrive and grow they must have access to the finance they need, and the Enterprise Finance Guarantee gives more firms the change to get vital funding. These four new lenders will help widen access to this successful scheme even further," he said.

Figures released by the Bank of England last week show that the UK's five main lending banks had fallen £1bn short of the total they had pledged to lend to SMEs under their Project Merlin agreement with the Government. Although the banks had exceeded their overall lending targets, they had only loaned £74.4bn to SMEs against a commitment of £76bn.

The Confederation of British Industry (CBI) was one of a number of business bodies calling for the Government to do more to help SMEs following the Bank of England's announcement. Although improved access to more varied sources of finance would help, there were barriers preventing SMEs from accessing lending through non-bank programmes such as the EFG, it said.

In a submission (8-page / 666KB PDF) to a Government review into non-bank sources of business finance, the CBI said that BIS' own figures showed that many small businesses were not aware of alternative schemes. Only 22% were aware of the existence of the EFG, it said, while only 20% had been aware of Project Merlin.

"One reason for this lack of awareness may be that the main alternatives to traditional bank lending, if provided by non-banks, are not as visible to SMEs as mainstream banking products. The lack of alternatives being used by smaller firms may also be reinforcing, as these firms rarely hear their peers discussing non-bank lending and so do not consider it an option," its submission said.

The CBI said it was "committed" to launching regional 'clubs' to allow businesses to access advice on a range of issues, including funding.