The National Loan Guarantee Scheme (NLGS) is being set up to help SMEs access cheaper finance, though the scheme is expected to help medium-sized companies in particular (the scheme is open to companies with an annual turnover of up to £50m).
Through the provision of £20bn of government guarantees on unsecured borrowing by banks, ministers hope the banks will be able to borrow at a cheaper rate and pass on the benefit to their customers.
Ministers estimate that businesses taking out an NLGS loan will receive a discount of one percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme.
Banks that have signed up tothe scheme so far are: Aldermore, Barclays, Santander, Lloyds and RBS. Around £5bn in guarantees will be made available in the first tranche.
Because the government is not guaranteeing individual loans to businesses, it isn’t taking on the credit risk of loans made under the scheme the banks retain the credit risk, and therefore their usual lending and credit parameters apply.
“The government promised to help small businesses get access to lower interest rates. Today, we deliver on that promise with a nationwide scheme,” says Chancellor George Osborne.
Entrepreneurs welcome the scheme. Duane Jackson, CEO and founder of Kashflow, says: “Today’s announcement is welcome and much needed news.
“Students have been helped through a loan agreement scheme for over 20 yeras now, and while I can understand the need to invest in the country’s future workforce, surely budding entrepreneurs who have the ability to add fuel to the UK economy in the shorter term should be a higher priority.
“The economic downturn has blighted the prospects of many startups, but for the UK to truly recover these small business are vital, and so must be encouraged. This government funding will go some way in helping to alleviate the struggles small business face.