UK ministers plan new state-guaranteed loan scheme for SMEs

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The UK government plans to launch a permanent replacement of the £ 65 billion Covid loan program with new state guaranteed guarantees to support bank lending to a wide range of small and medium-sized businesses.

Under plans still being finalized by Treasury officials, the new loan scheme could include a guarantee of up to 80% for loans of up to £ 10million for businesses deemed viable but incapable. obtain financing from their lender, according to Industry and Whitehall. The figures.

Banks will be allowed to set the interest rate for new loans, although the rate is likely to be capped at around 15%, with bankers fearing that any artificially low rate imposed by the state would actually wipe out all other loans to small businesses. companies. .

In the spring, Chancellor Rishi Sunak rushed to set up several loan programs for businesses affected by the Covid foreclosure to avoid a wave of insolvency as the economy froze.

They were originally designed to end in September but have already been extended until the end of January.

Although it is hoped that the worst economic effects of the pandemic will occur next year, ministers are still ready to deal with persistent damage to the economy until 2021, as Covid prevention measures will remain in effect. place until the immunization program has started.

The authorities fear that many small businesses are still severely weakened and are struggling to obtain the necessary financial support.

It is also hoped that this money will support small businesses that want to invest and grow as they seek new markets after Brexit.

Access to the new lending scheme is expected to be much stricter than the rebound lending scheme, which has supported £ 42bn in lending by banks to smaller businesses in the UK.

Light checks on borrowers under the scheme have allowed banks to speed up lending, but have raised concerns about fraud and default that could cost taxpayers billions of pounds. The government set the interest rate on rebound loans at just 2.5 percent, with no interest or repayment in the first year.

Rules for the new program will be more in line with the existing Coronavirus Business Interruption Loan Program (CBILS), which has supported around £ 18.5 billion in loans during the pandemic to large SMEs.

This will mean more stringent checks on a borrower’s creditworthiness. One of the most controversial elements will be the possibility of reinstating a partial personal guarantee on the loans.

The use of personal guarantees, which may mean that some of the borrower’s assets are used as collateral, raised concerns when they were included in the initial forms of CBILS in the spring.

But bankers argue that guarantees were standard practice under similar regimes before the pandemic, and any new permanent lending facility should reflect more normal market conditions or risk further distorting the lending market.

Officials want the new scheme to be open to a wide range of businesses and therefore should set low-end loans at just thousands of pounds up to £ 10million repaid over six years.

The program is also expected to support revolving facilities, such as overdrafts and asset finance facilities.

The Treasury has confirmed that the new program is expected to be rolled out from January next year, in line with plans originally announced by Mr. Sunak in September’s “winter economic plan”.

“Our loan programs have provided a lifeline for thousands of businesses across the UK – helping them survive this crisis and protect millions of jobs,” he said. “We are working on a new successor loan program and will provide more details in due course.”

As the terms of the program are still being finalized, there is also the possibility that the Treasury may again extend existing lending programs to ensure that businesses have access to finance after the UK leaves the Single Market. of the EU.

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