1.114 The Government is launching a package of interventions worth up to £21 billion to ease the flow of credit to businesses that do not have ready access to capital markets, with scope to increase the scale of this package in future if necessary.
1.115 The National Loan Guarantee Scheme will lower the cost of bank loans for smaller businesses with turnover of up to £50 million. The Government will allow participating banks to raise up to a total of £20 billion of cheaper funding over the next two years under a government guarantee, provided they pass through this lower cost of funding to smaller businesses. In many cases, this will lead to a reduction of up to one percentage point on the cost of the business loan. The scheme will focus on new loans and overdrafts, to help increase the supply of credit in the economy. In considering banks' access to the scheme, the Government will take into account banks' commitment to smaller businesses. In order to qualify for the guarantees, banks will have to show that they are passing through the benefit of the guarantee to cheaper loans (as in the European Investment Bank's well-established 'Loans for SMEs' scheme). Firms should be able to apply for these funds through participating banks in the normal way. The scheme will be operational as soon as possible, subject to state aid approval.
1.116 The Government will also help businesses raise funds from non-bank sources by making available an initial £1 billion through a Business Finance Partnership, to invest in mid-sized businesses and SMEs in the UK. A number of reports have shown the reliance of these businesses on banks as a source of debt fnance.16 The partnership will initially focus on co-investment with the private sector through loan funds, which will lend directly to mid-sized businesses in the UK. The Government will begin the process of allocating funds early in 2012. The Government will also consider options for investing through other non-bank lending channels, and welcomes proposals. This will help to diversify the sources of finance available to businesses.
1.117 In addition the Government will:
• extend the Enterprise Finance Guarantee (EFG) from January 2012 to include businesses with up to £44 million annual turnover, and a number of new lenders will be accredited to offer EFG lending;
• amend the regulations for UK covered bonds to provide greater transparency for investors and help banks use covered bonds to raise funding;
• establish an industry working group to explore how to further develop access to non-bank lending channels, including forms of bond issuance, for SMEs and mid-sized businesses. The group will be led by the Department for Business, Innovation and Skills and will report by Budget 2012; and
• continue to work with the British Bankers' Association's (BBA) Business Finance Taskforce. The Government welcomes the progress the banks have made in delivering their commitments, as well as their intention to continue to take these initiatives forward in future. In particular, the Government welcomes the BBA's intention to work with Community Development Finance Institutions (CDFIs) to put in place a system to refer unsuccessful loan applicants to CDFIs.
1.118 The Government will continue to assess further options to increase the supply of credit to SMEs and mid-sized businesses. Further progress will be announced at Budget 2012.
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16 For example, Financing a Private Sector Recovery, HM Treasury and Department for Business, Innovation and Skills, July 2010; Beyond The Banks, NESTA, November 2011; and Future Champions, Confederation of British Industry, October 2011.