UK unveils £20 billion scheme for small firms

Business secretary Lord Mandelson has unveiled a £20-billion three-prong measure designed to address the cash flow, credit and investment needs of small and medium businesses.

The support package consists of loan guarantees and a new 'enterprise fund' aimed at helping companies struggling to access finance for working capital and investment, building on the commitments outlined in November's pre-budget report.

* A £10-billion Working Capital Scheme, securing up to £20 billion of short-term bank lending to companies with a turnover of up to £500 million
* An Enterprise Finance Guarantee Scheme, securing up to £1.3 billion of additional bank loans to small firms with a turnover of up to £25 million
* A £75 million Capital for Enterprise Fund (£50 million from Government augmented by £25m from the banks) to invest in small businesses which need equity

The government will open a £1-billion fund and provide banks with guarantees covering 50 per cent of the risk on existing and new working capital portfolios up to £20 billion, in effect insuring banks against businesses defaulting on their loan re-payments.

The WCS is a direct response to the constraint on bank credit available for lending to ordinary-risk businesses with a turnover of up to £500 million a year.

In addition, the guarantee will free up capital which the banks can use for new lending which is a condition of this scheme. This lending would otherwise not have been provided.

Originally a separate £1-billion fund was intended for small exporters to access short-term working capital till they receive their overseas payments. However, this has now been expanded to cover a wider group of businesses and lending, including exporters.

As a result of the financial crisis, the government had committed to this measure to bolster credit facility from banks to help small and medium firms from winding up.

In recent times, a large number of comapnies have had to shut down due to credit crunch like Adams Childrenswear, music and entertainment chain Zavvi, MFI , Woolworths, crystal and china and ceramics firm Waterford Wedgwood. (See: Britain's largest music and entertainment chain Zavvi Group shuts 22 stores)

The second measure is the 'enterprise finance guarantee scheme' (EFGS) where the government will provide £1 billion of guarantees support to £1.3 billion of additional bank loans to smaller firms with an annual turnover of up to £25 million, which are looking for loans of up to £1 million for a period of up to 10 years.

The EFGS scheme aims 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.

The guarantee, available through high street banks, will apply to loans and can also be used to convert existing higher-interst overdrafts into loans to enable businesses to free up their current overdraft facilities to meet working capital needs.

The third measure is a £75-million 'capital for enterprise fund' comprising of £50 million from government funds and £25 million from banks like Barclays, HSBC, Lloyds TSB, and RBS to invest in small businesses which need equity.

This fund is designated to help businesses raise new long-term finance and the government will also offer to invest in viable companies, which have high levels of existing debt through this fund.

The fund, to be managed externally, will provide long-term capital to businesses which have exhausted traditional forms of finance. Companies can then use this capital to invest in and grow their business.

While unveiling the measures, Lord Mandelson said that British companies are the lifeblood of the economy and it is crucial that government acts now to provide real help to support them through the downturn and see them emerge stronger on the other side.

Lord Mandelson also confirmed discussion with trade credit insurance providers for a government scheme to help companies affected by reductions in their credit insurance.
Reactions to the package from business organisations have been cautious and fear that the package is not sufficient to solve the credit crisis that companies face.

Moreover, only companies with a sound business that are facing credit crunch due to sudden withdrawal of credit are likely to be eligible for the two funds.

Companies such as high street stores or the ones that have high levels of unemployment will come under the proposed 'capital for enterprise' where their debts will be underwritten, thereby allowing them to access more borrowing.

This package is expected to be followed by further bail-out measures for sectors under pressure like the auto industry.

However, larger companies are unhappy as there was no bail out package plans made for them to sail through this recession period.

Some reacted to the government widening the pre-budget report from small businesses to medium-sized, but some of Britain's large firms are finding it difficult to manage their day to day operations.

In order to help businesses identify their financial needs, the government has launched a new "one-stop shop" easy-to-use web portal, businesslink.gov to direct companies to the most appropriate form of support and help them ascertain their eligibility for a range of government support.