Government guarantees descend into muddle

Peter Mandelson

Details still to be hammered out on Lord Mandelson’s £1.3bn scheme

When business secretary Lord Mandelson announced a multibillion-pound loan
guarantee scheme last week to unblock the credit market for SMEs there was an
almost audible sigh of relief. But the satisfaction has turned to frustration
amid claims that the government failed to finalise details of its £1.3bn
Enterprise Finance Guarantee scheme with the banks before announcing it.

The EFG scheme, which underwrites 75% of bank loans to companies with a
turnover up to £25m, is made available through Barclays, Clydesdale/Yorkshire,
HBOS, HSBC, Lloyds TSB, Northern and RBS/Natwest. But confusion over how the
scheme works threatens to delay lending just when small businesses need it most.

Part of a government rescue package worth more than £11bn, the EFG has been
caught up in confusion and contradictory claims.

Bank managers have told accountants and their clients that the internal
systems and processes underpinning the scheme are not in place and, more
importantly, that the detail on EFG loan conditions has not yet been finalised
with the government.

Privately, banks have bemoaned the lack of detail to fulfil the government
pledges to free up credit. Last week a senior source at Barclays told
Accountancy Age it had not received forms to apply for the fund.
Another source said: ‘Every bank is looking at what has to be done and they are
trying to put the products together but no one is sure of the rules. There
wasn’t enough direction from the government before the announcement.’

However, Barclays said the original source quoted by Accountancy Age
last week was misinformed.

Earlier this week a spokesman said that initially Barclays, along with some
other banks, was in talks with the Department for Business, Enterprise &
Regulatory Reform to finalise the details of the EFG, but within a few days it
was lending under the scheme and had already processed applications.

The spokesman said: ‘Barclays has been a key driver and supporter of the
Enterprise Finance Guarantee, and we have played a key role in shaping it along
with government and other stakeholders.

‘Since the EFG was announced on 14 January, Barclays has already processed
and evaluated millions of pounds’ worth of applications and we are proud to
confirm we have already approved loans for customers.’

A BERR spokesman said: ‘The first small firms have received approvals. Banks
have made firm offers of lending to them under the scheme. Eight banks are
already processing applications from small firms for lending backed by the
Enterprise Finance Guarantee.’

But advisers and businesses tell a different story. Kevin Dickens, president
of the UK200 Group, which represents 120 UK accounting firms, said some
high-street banks did not know how to apply for the scheme.

‘The infrastructure is lacking behind the grandiose statements,’ Dickens
said. ‘I have been trying to work with banks to find out the details of the

He added that banks had told him that EFG packages would not be available
until the end of February.

SME specialist Redstar Telecom has been looking for extra financing. It was
initially encouraged by the announcement of the EFG, but James Doak, managing
director, said the company had not yet found a bank that had details of the

‘There is no appetite to lend,’ said Doak. ‘The recent announcements are
aimed at creating and safeguarding jobs, so as the company is looking to create
jobs it sounds like a good option. However, is there anyone out there who can
help explain the scheme or criteria to us?’

John Grange, a business adviser to SMEs with government-sponsored free advice
service Business Link, said it would take time for the banks to familiarise
themselves with the loan schemes and for money to filter down to businesses.

Getting funds flowing again

Government measures include:

  • Working Capital Scheme

Gives banks guarantees covering 50% of the risk on existing and new working
capital portfolios worth up to £20bn.

  • Enterprise Finance Guarantee Scheme

The provision of £1bn of guarantees to support up to £1.3bn of bank lending
to smaller firms with an annual turnover of up to £25m looking for loans of up
to £1m for up to 10 years.

  • Capital for Enterprise Fund

An offer to invest in viable companies with high levels of existing debt
through a new £75m fund. Banks are contributing to this fund, which will be
managed externally, and companies can use the capital to invest in and grow
their business.

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