The new measures announced today by the government are designed to offer help to small businesses across the UK that are having problems accessing finance from their banks.
Effectively, the government is providing guarantees that small business loans will be repaid in order to encourage the banks to lend more.
"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," said Business Secretary Lord Mandelson.
"We know that some companies are struggling to secure the finance they need, not because of any failure in their business, but due to tougher credit conditions," he added.
The measures are designed to help businesses that are having immediate cash flow difficulties, as well as those that are looking to invest for the future.
In order to address these different needs, they are encapsulated in three main packages.
WORKING CAPITAL SCHEME
• The centrepiece of the government's initiative is the Working Capital Scheme. This will guarantee 50% of £20bn of short term loans, and so involves a commitment from the government of £10bn.
• This money is designed to help banks increase all types of lending - both existing loans and new loans.
• Companies with a turnover of up to £500m are eligible to apply for funds under this scheme.
• Under the scheme, banks will submit a portfolio of loans to the Department for Business, Enterprise & Regulatory Reform (BERR), and it will guarantee 50% of the value of the portfolio.
• Barclays, HSBC, Lloyds TSB and RBS have all shown interest in the scheme, according to BERR.
• It hopes that the first £1bn of guarantees will be operational by 1 March.
• If the scheme proves successful, the government will make further guarantees up to 31 March 2011.
• The banks will have to pay a premium to BERR for these guarantees, and pricing will be agreed when a portfolio of loans is submitted. The more risk involved in the portfolio, the higher the fee. This premium will almost certainly then be passed on to the company borrowing the money.
• The scheme is an extension of an initiative announced in last year's pre-Budget report to support a £1bn facility for smaller exporters to access short term capital.
ENTERPRISE FINANCE GUARANTEE SCHEME
• This scheme will support up to £1.3bn of new lending by banks.
• It is open to businesses with a turnover of up to £25m.
• It is designed to enable businesses to secure loans of between £1,000 and £1m, repayable over 10 years.
• The government guarantees 75% of the loan, with the banks covering the remaining 25%.
• Most businesses in most sectors are eligible for the scheme, but those in the agriculture, coal and steel sectors are not eligible.
• The guarantees will be available through Barclays, Clydesdale/Yorkshire Bank, HBOS, HSBC, Lloyds TSB, RBS/Natwest and Northern Bank. It will be available from other lenders if they apply.
• The scheme will operate until March 2010.
• This is an extension of the £1bn Small Business Finance Scheme outlined in the pre-Budget report.
CAPITAL FOR ENTERPRISE FUND
• The government has also launched a £75m Capital for Enterprise Fund.
• Fifty million pounds will be provided by the government and £25m will be provided by Barclays, HSBC, Lloyds and RBS.
• The fund will allow businesses to sell debt in exchange for equity. In other words, they will swap some for their debt for a slice of their business.
• This may take many forms, including a share of future profits. The two main providers of equity finance for private investors are venture capitalists - also known as private equity firms - and business angels.
• Companies with a turnover of up to £50m will be able to gain equity of between £250,000 and £2m.
• Enterprise Capital Funds have actually been around since 2006 for businesses that find it hard to access capital.
• Any business wishing to take advantage of the Capital for Enterprise Fund should call the registration helpline on 0845 459 9780.
OTHER OPTIONS
One other option for businesses in need of finance is the regional loan transition fund, although this only applies to companies in England.
This £25m initiative is designed to help businesses at a regional level up to the end of June 2009.
These funds are administered by Regional Development Agencies (RDAs) and provide loans to businesses that have exhausted all other possibilitities for accessing finance.
In order to find out which scheme is best suited to an individual business's needs, help is available at the BERR website.
Alternatively, businesses can call the BERR Business Link helpline on 0845 600 9 006.
For the Working Capital Scheme and the Enterprise Finance Guarantee Scheme, businesses need to contact their banks.
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