Member News
The government has unveiled its latest proposal to tackle the recession, which includes a plan to underwrite £20bn of loans to small and medium-sized businesses.
The multi-billion pound package is designed to free up lending to small firms, through loan guarantees and a new enterprise fund for businesses struggling to get access to funding.
Business secretary Lord Mandelson stated that it was "crucial" that the government took action to prevent more companies from going bust.
Some business groups and unions are claiming that 100 small businesses are going under every day.
The government initiative will include a £10bn working capital scheme, as well as an enterprise fund worth £75m. This will consist of £50m from the government and the remainder from banks.
The government also unveiled an enterprise finance guarantee scheme, which will provide up to £1.3bn of additional bank loans to small firms with a turnover of up to £25m.
But shadow chancellor George Osborne accused the government of introducing a scheme similar to the £50bn loans guarantee scheme suggested by the Conservatives over recent weeks.
Osborne stated: "Let us hope that they will properly implement this Conservative policy rather than a pale imitation, or else they run the risk of repeating the mistakes of their expensive temporary VAT cut and achieving nothing."
But Lord Mandelson maintained: "UK companies are the lifeblood of the economy and it is crucial that government acts now to provide real help to support them through the downturn and see them emerge stronger on the other side.
"We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions."
Lord Mandelson also confirmed that the government was in discussions with trade credit insurance providers to offer a government scheme to help companies affected by reductions in their credit insurance.
The announcement was accompanied a new wave of job losses and redundancy warnings, including 500 at Barclays as part of an international cutback of 2,100 staff.
Lord Mandelson told a press conference in London that the global economic crisis was based on credit problems.
"Many companies are struggling to finance themselves because of the crisis in the banks," he said.
"Their business models are not flawed, but the credit crunch has drastically reduced the amount of capital available, and banks have tightened their lending criteria.
"Today's package is designed to address this problem directly. We are offering specific solutions - not a blanket subsidy."
Lord Mandelson said the proposals were intended to restore confidence in the market.
He told the BBC: "We saved the banks from collapse last autumn. We know that it is a struggle for them to get back on their feet and get back to normal lending.
"Both the initiatives going live today will enable the banks to do so in a very specific and very focused and very funded way, unlike the Conservative proposals."
He said that the proposals are "targeted funding measures" to help "viable, credit worthy" small businesses. But he claimed they would also help larger firms who can take advantage of freed up capital.
"Both of these things are very important," he said. "They need to target both smaller and larger firms that are viable and credit worthy but are finding it difficult to sustain their existing lending or find new lending in the market place."
He added that the chancellor Alistair Darling will continue to discuss the terms of the package with the banks.
"It is a relatively small sum of taxpayers' money to get a much bigger benefit and advantage for firms that need continued access to lending or new lending in the future," Lord Mandelson said.
"The banks will have to negotiate with us for the resources, the guarantees we are offering. They are going to have to implement these schemes in the way that we are prescribing otherwise they won't have access to the resources."
Lord Mandelson also suggested that it was too early to see the real benefits of the government's 2.5 per cent VAT cut.
He maintained that the cut was "providing real help now".
"This VAT cut is not simply for Christmas," he argued. "We are talking about a cumulative cut, month by month for the course of the year."
Stakeholder Response: ABI
Nick Starling, the ABI's director of general insurance and health, said:
"The ABI has been working closely with the government to find a solution to the lack of credit availability in current market conditions. This announcement reflects the confidence government has in the trade credit insurance market. We look forward to taking part in further detailed discussions."
Stakeholder Response: Finance and Leasing Association
Stephen Sklaroff, director general of the Finance and Leasing Association, said: "The government is right to look at ways of encouraging lending to businesses of all sizes, and today's announcement is helpful.
"But it is essential that ways are also found of encouraging business investment via asset finance, which provides vital business equipment to many SMEs and larger companies and accounts for a third of all UK fixed capital investment and half of all car purchases.
"We have asked the government to ensure that motor and asset finance companies, including those which are not banks, have access to the liquidity and guarantee schemes aimed at encouraging business lending."
Stakeholder Response: NWDA
Steven Broomhead, chief executive of the NWDA, said: "This is excellent news for businesses in the North West. We understand that access to finance and support are major issues for many businesses in this current economic climate. I would urge all businesses in the region who are struggling or are starting to see signs of decline to get in touch with our Business Link North West service as soon as possible.
"We have specialist advisors waiting to help your business. The North West is a robust and diverse economy and it is important that in 2009 we are developing a business culture of realistic optimism and this support from the government today will play a big role in this."
Stakeholder Response: ACCA
Professor Robin Jarvis, head of ACCA's SME committee, said: "If implemented properly, loan guarantees could help hundreds of thousands of smaller firms access credit on reasonable terms – giving them a better chance of surviving the downturn and retaining employees."
ACCA's SME committee, on which both banks and small businesses are represented, has called for loan guarantees to secure working capital since November 2008. In submitting evidence to the Business and Enterprise Committee in early December 2008, ACCA also stressed the need to strengthen supply chains and appreciate the systemic nature of the risk they transmit between customers and suppliers.
The effectiveness of the guarantees will now depend on how widely they are used, their effect on trade credit and default rates among beneficiaries, and on whether they will be able to encourage new lending in addition to refinancing existing loans.
Professor Jarvis said: "Lending guarantees will not solve all of the sector's problems, nor will they keep a large number of businesses from going to the wall. But they could help those businesses that are fundamentally sound while restoring lenders' confidence – all at a cost far lower than that of any reasonably effective fiscal stimulus."
Lending Guarantees: 3 Scenarios from ACCA
In the best-case scenario, guaranteed lending would help banks reassess the creditworthiness of those borrowers past the credit event horizon – the point at which risk is either too high or too indeterminate to bother. High uptake could restore the flow of not only bank but also trade credit and result in lower default rates overall.
A more likely scenario would see the overall supply of credit rising very slowly, as lenders choose to strengthen their balance sheets by swapping bad loans for government-guaranteed ones. This is still a relatively positive outcome as more confident banks should eventually be able to offer more and cheaper credit.
The worst-case scenario would involve insufficient uptake of the guarantees to make any difference to business sentiment or banks' balance sheets. In the absence of trade credit, lending will only postpone the inevitable for the few beneficiaries, leaving the taxpayer slightly worse off for guaranteeing their debt.
Dods Parliamentary Communications Ltd