£20bn gov't scheme to help SMEs in credit crunch

The government has introduced measures to give small and medium-sized businesses access to up to £20bn in loan finance, aimed at helping companies during the credit crunch.

The business secretary, Lord Mandelson, announced three measures on Wednesday, saying they are designed to tackle the cash flow, credit and investment needs of businesses. The package depends on the involvement of UK high-street banks, and builds on existing government aid schemes.

"We know that some companies are struggling to secure the finance they need, not because of any failure in their business, but due to the tough credit conditions," Lord Mandelson said in a statement from the Department for Business, Enterprise and Regulatory Reform. "That is why we have designed a package of measures addressing different forms of credit and providing real help for small business."

The first loan guarantee measure is a £10bn Working Capital Scheme (WCS) that, according to the government, will secure up to £20bn of short-term lending to companies with a turnover of up to £500m. It expands a scheme announced by the chancellor in November, to support a £1bn bank facility for smaller exporters. This has now been opened up to more businesses and lending, and not just exporters.

The second guarantee initiative is the Enterprise Finance Guarantee (EFG) scheme, aimed at securing up to £1.3bn of additional bank loans to for businesses with a turnover of up to £25m. It is intended to help "smaller, credit-worthy companies which might otherwise fail to access the finance they need for working capital or investment finance due to the current tight lending conditions", according to the BERR statement. The EFG scheme will guarantee 75 percent of loans, with banks covering the remaining 25 percent.

The EFG builds on a £1bn fund, announced in November, that was originally intended to tide over exporting companies while they waited for overseas companies to pay outstanding invoices.

Finally, the government and banks will invest £75m in viable companies that have high levels of existing debt through the Capital for Enterprise Fund. Of this, £50m will come from the government and £25m from banks. This is an expansion of a £50m scheme originally announced by the chancellor to help small businesses to convert debt into equity.

The banks that expect to participate in and administer the schemes are Barclays, Clydesdale/Yorkshire Bank, HBOS, HSBC, Lloyds TSB, RBS/Natwest and Northern Bank.