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Small businesses want plan B to step up lending

£20bn has been earmarked for a national loan guarantee scheme – but there are fears it will not get credit flowing

The government is facing calls to bolster credit to small business amid fears that the £20bn of “credit easing” being promised by the chancellor will not be enough on its own to get loans flowing.

As Treasury officials attempted to hammer out how a national loan guarantee scheme (NLGS), a key plank of George Osborne’s credit-easing proposals, will work in practice ahead of an announcement tentatively slated for 15 March, there were already calls from small businesses to devise alternatives to bank lending and to set up a bank for small and medium sized businesses.

The failure of the high street banks to meet their lending targets under Project Merlin, and the £9.6bn contraction in business lending during 2011, has turned the focus on what the government will do to help small businesses grow and in turn bolster the economy in the face of a threat of a downgrade to the UK’s triple A debt rating by Moody’s.

Announced with much fanfare in his party speech and outlined in the autumn statement, credit easing is the way Osborne is now focusing on getting loans to small businesses.

In the statement he said it would take the form of £20bn in the NLGS and £1bn for a business finance partnership, which will help to finance larger businesses. Investment firms such as M&G are expected to submit bids to participate in the business finance partnership, while the high street banks will offer loans through the NLGS.

The details of how the NLGS will work are still being negotiated, but the idea is the banks benefit from the government’s triple A rating to reduce their own costs of funding and in turn reduce the cost of loans to small firms by one percentage point. One idea thought to be under consideration is for the £20bn to be shared out among the major lenders according to their existing market shares.

A spokesman for the Federation of Small Businesses, while hopeful that credit easing would cut the cost of lending, said that peer-to-peer forms of lending – where individuals lend directly to businesses – needed to be explored.

The Confederation of British Industry called for bond markets to be opened to medium-sized businesses in its submission to a review commissioned by business secretary Vince Cable into non-bank forms of finance to small businesses.

David Kern, chief economist at The British Chambers of Commerce said: “The government must announce a substantive credit-easing plan as soon as possible. The idea of an SME bank should also be seriously considered, given the difficulties that small firms are facing in obtaining credit on reasonable terms. The upcoming budget gives the chancellor an opportunity to announce a package of comprehensive measures to enable businesses to create jobs and drive the recovery.”

The budget is scheduled for 21 March, although it is thought that an announcement on how credit easing will work is slated for March 15, days before Osborne faces MPs. The Treasury would only say that details were being worked on and more information would be forthcoming.

Analysts at Swiss bank UBS reckon that government policy towards the banks – which need to hold more capital and prepare to erect a ring fence around their high street banks – is in part to blame. “We believe the UK banks would be lending more, and funding more cheaply, if they and their shareholders had confidence that today’s agenda was substantially complete,” the UBS analysts said. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds