Government bail-out for small businesses

A manager talks to chefs in a restaurant

The government has unveiled a £20 billion plan to help small businesses survive the economic downturn.

The scheme, launched by business secretary Peter Mandelson, will see the government guarantee loans to businesses, in effect insuring banks against any future losses. The government says this will not only give banks the confidence to lend to businesses, but also help firms cope with cash flow, credit and investment issues during the downturn.

Available to businesses with a turnover of up to £500 million a year, the Working Capital Scheme will see the government provide banks with guarantees covering 50% of the risk on existing and new business portfolios. This will ensure that loans are not withdrawn or reduced, and will also free up extra capital that banks will be required to use for new lending.

The guarantee will be available through high street banks, and applies to loans as well as existing overdrafts.

At the launch of the scheme, Mandelson said: "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. That is why we have designed a package of measures addressing different forms of credit and providing real help for businesses."

Other measures include a further £1.3 billion being made available for businesses with a turnover of up to £25 million, as well as a £75 million investment in an Enterprise Fund for small firms in need of equity but unable to access credit.

The launch comes after the British Chambers of Commerce warned that the economic outlook experienced “frightening" deterioration in the final three months of 2008, and is now facing a very serious recession with the downturn deepening at an “alarming pace”. Read more

Meanwhile, the latest figures show that lending to small businesses slowed towards to the end of 2008, although it remains above 2007 levels.

In 2007, monthly bank loans to businesses averaged £268 million increasing to £348 million a month in 2008. However, by October this fell to £113 million, increasing slightly in November to £153 million.

David Dooks, statistics director at the British Bankers’ Association, says: “Lending to small businesses is at a higher level than at the end of 2007, and lending continues to grow month-on-month.

“[…] Loan demand is slowing and small businesses are using their cash flows for working capital rather than seeking credit. Nevertheless, over 40,000 small businesses a month are establishing new banking relationships with high street banks.”

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