Page last updated at 16:42 GMT, Thursday, 30 October 2008

Q&A: Money for small businesses

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European money will now be available to help smaller businesses

Chancellor Alistair Darling has announced £4bn of funding will be available to small and medium-sized firms, to support businesses through the downturn.

The funding will come from the European Investment Bank (EIB), via Britain's High Street banks, and will amount to about £1bn of loans a year, for the next four years.

But how can firms tap into this money - and just what can they use the funding for?

So which companies can apply for these new loans?

The EIB says that all independent firms with up to 250 workers will be able to apply. However, organisations which are subsidiaries or holding companies of industrial groups will not be allowed to apply.

What kind of projects will be eligible for this funding?

The EIB says that its loans can be used to support a wide range of investment or expenditure necessary to help a small business grow. For example, the money could cover the purchase of a factory.

In principle, the purchase of land would be ruled out unless it was vital for investment. Buying up agricultural land is totally excluded.

The spending can be on more intangible items. For instance, all of the following would be eligible:

  • Spending directly related to research and development
  • Building up or taking over distribution networks
  • The filing or acquisition of patents
  • And even the costs incurred in buying up another business to keep that business going - so long as both the buyer and firm being sold are small or medium-sized enterprises.

Are any sectors of the economy excluded?

EIB loans can support investment in any economic sector except arms, gambling, tobacco, activities involving animal testing, activities whose environmental impact cannot be mostly mitigated or offset, sectors that are morally or ethically controversial - such as human cloning - and pure property development.

Also excluded are purely financial transactions, such as company takeovers, with the exception of transfers of businesses in the specific circumstances described above.

How much money can firms borrow, and what are the terms of the loans?

The loans can support funding for any amount ranging from very small investments to projects costing up to £19.6m. Loans can be between two and 12 years.

The actual length of the loan will depend on the economic life of the project financed. The maximum amount provided by the EIB for any one loan will be £9.8m.

So how do firms apply for a loan?

five pound note
The loans will be available for up to 12 years

Not through the EIB directly. The EIB money is provided throughout the European Union via commercial banks, which will be responsible in each country for evaluating each loan application submitted by a company.

So for loans, it will be entirely up to the High Street bank to decide whether or not to grant a loan. As yet in Britain, not all banks do this.

The national chairman of the UK's Federation of Small Businesses, John Wright, said: "Over 80% of small businesses use the four major banks, yet only one - Barclays - currently supply EIB finance.

"We need to be assured that this money will actually filter down to small businesses."

What the EIB's participation does is to make the terms of the loan more favourable than they otherwise would have been. Thanks to credit rating, the EIB can borrow funds on the money markets on favourable terms, which it passes on in the loans that it grants.

More than 100 banks in the 27 member states of the European Union already work regularly with the EIB. For more details, consult the EIB website.

What about very small firms?

The EIB and the European Commission are working together to establish a pan-European microcredit fund aimed at very small enterprises.

This fund will allow loans to be granted, through about 30 European microfinance institutions, for the creation and development of very small enterprises.



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