THE £1.3bn fund to help small businesses has been criticised by a Liverpool finance expert as ineffective.
Peter Alcock, head of corporate finance at chartered accountants Wilson Henry, said the Enterprise Finance Guarantee (EFG) scheme will not change banking practices. The scheme has been launched by the Government as part of a package of measures designed to help small business access bank funding during the current economic uncertainty.
EFG, which has replaced the Small Firms Loan Guarantee scheme, is open to businesses with an annual turnover of up to £25m, seeking loans of £1,000 to £1m, repayable over 10 years.
Mr Alcock believes that banks have often been lukewarm in promoting these schemes as they tend to view them as honey pots for poorly-performing businesses, which are unable to obtain lending on conventional terms.
He said: “The Small Firms Loan Guarantee scheme has been in place for over 20 years whereby the government underwrites 75% of a bank loan.
“This means the bank is only exposed to a quarter of the loan should things go wrong. It remains to be seen how participating banks will adopt these new measures.
“It is unlikely they will be automatically applied in all new and existing lending situations and whether the cost of doing so will be palatable.
“Banks will argue that the basics of good banking are not being rewritten, all lending decisions should stack up on their own merits and a government guarantee does not make a poor lending decision a good one.”
Mr Alcock believes banks will not lend to businesses who are feeling the full impact of the downturn.
“Banks are much more comfortable lending where there is a fixable working capital problem,” he said.
“They are far less happy lending to a business where there is month on month decline in turnover and bank loan and interest payments are not being met.
“A bank will look very closely as to what steps management is taking to stop cash haemorrhaging out of the business before committing to a loan, irrespective of these new proposals.”
alex.turner
