Small business borrowing costs stubbornly high despite National Loan Guarantee Scheme

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25th June 2012

Interest rates on loans under £1m higher than last year

The Government's National Loan Guarantee Scheme has not led to any significant reductions in the overall cost of loans for small businesses, says Syscap, a leading independent finance provider.

Syscap comments that interest rates on business loans under £1 million fell only 0.08%, from 3.79% to 3.71% in April 2012, despite the introduction on March 20 of the National Loan Guarantee Scheme (NLGS). Interest rates on these loans are actually higher than the 3.62% a year ago (April 2011).

The NLGS, part of the Government's credit easing programme, will underwrite up to £20 billion in lending in order to lower the interest rate of small business loans made under the scheme by 1%.

Says Philip White, Chief Executive of Syscap: "The NLGS has not yet had the hoped-for impact on borrowing costs for small businesses as a whole. That will come as a real disappointment to the small business community."

"This may change as more banks introduce their NLGS loans, but at the moment, it's difficult to identify any positive changes in the overall small business lending environment."

Nine banks have signed up for the NLGS, although not all have made discounted loans available. One of these has not yet announced when it will launch its reduced-rate small business loans, almost three months after the scheme's launch. One participating bank has set its minimum loan amount at £25,000, effectively ruling out loans to the smallest class of businesses.

Syscap says that the NLGS is the third in a succession of major Government initiatives aimed at increasing lending to small businesses; Project Merlin and the Enterprise Finance Guarantee Scheme (EFG) are the two launched previous.

Adds Philip White: "Both Project Merlin and the EFG scheme fell some way short of expectations with the interest rate on small business loans still higher than it was a year ago and no reversal in the reduction in lending by banks to SMEs."

The Bank of England says it is planning an estimated £80 billion 'funding for lending' scheme, intended to stimulate bank lending to businesses. Syscap say that this is a step in the right direction, but that uncertainty remains over whether this scheme will get new funding to SMEs.

Continues Philip White: "Banks are not reluctant to lend to UK businesses as a whole- the problem is centred on lending to SMEs - this is where interest rates have remained stubbornly high."

Philip White says that whilst efforts to get an increase in traditional bank lending to SMEs have had patchy success, alternative financing solutions, such as leasing, are gaining in popularity amongst SMEs.

Explains Philip White: "Small business loans from banks are hard to get and are an insecure form of finance compared to leasing."

"The leasing sector is increasing the amount of money it provides to fund business investment. Personally I think the Government should be building on the successful track record of the leasing sector over the last year by targeting support there."

*Source: Bank of England

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