We’ve been hearing loud whispers all week, but Business Secretary Lord Mandelson officially launched the Government plan this morning: it's promising to guarantee 50% of up to £20bn in loans from four UK banks, effectively pumping £10bn into the system to try and get credit flowing again. And there’s more: there’ll also be an Enterprise Guarantee Scheme, in which the government will guarantee up to 75% of another £1.3bn in bank loans, and a £75m fund that allows heavily-indebted companies to swap debt for equity. All welcome steps – but will they be enough?
The measures are all designed to get UK banks lending to their small and medium-sized business customers again – instead of turning them away because they’re worried that they won’t be able to pay the money back. The centrepiece is the (heavily-trailed) Working Capital Scheme, which will see the Government underwrite up to 50% of new and working capital credit lines offered by Barclays, HSBC, Lloyds and RBS. The idea is that in return for a fee, the Government will basically shoulder half of the risk – thus freeing up extra capital for the banks to pass onto other borrowers. Any ‘ordinary-risk’ business (i.e. probably later-stage stable companies) with a turnover of less than £500m will be eligible to apply.
Mandelson also announced two other measures today. The related Enterprise Finance Guarantee Scheme, which is aimed at smaller businesses (those with a turnover of up to £25m), will see the Government provide another £1bn in guarantees to support £1.3bn of additional financing. This will let banks convert overdrafts into loans, so businesses can use their overdrafts for working capital. And then there’s the £75m Capital for Enterprise fund (an extension of the £50m fund announced in the PBR), which will allow companies to get their hands on cash by swapping debt for equity.
Today's measures have received a cautious welcome – the general consensus being that it’s at least a step in the right direction. There’s the obvious risk of the taxpayer losing out if some of these loans go bad (the Government has set aside £225m for that eventuality) but it’s clear that something needs to be done to get the system moving again. The real question is whether this will be enough. Critics are arguing that £20bn won’t be sufficient to persuade our battered banks to start doling out loans again – the Tories, for example, are still banging the drum about their own £50bn National Loan Guarantee Scheme, which looks remarkably similar to Mandy’s new plan. But much bigger.
Still, at least this sounds like a more useful idea than spending billions on a marginal VAT cut...
In today's bulletin:
Mandelson launches £20bn finance scheme for SMEs
Mervyn Davies steps up as Citigroup becomes bitty group
JJB chaos as sales slump and Ronnie left red-faced
Goldfingers: the men with the Midas touch
SME's glass really is half-full