The UK government is planning to launch a permanent replacement for the £65bn Covid loans programme with new state-backed guarantees to support lending by banks to a broad range of small to medium-sized business.
Under plans still being finalised by Treasury officials, the new loan scheme could carry a guarantee of up to 80 per cent for loans of up to £10m for businesses that are deemed viable but unable to obtain finance from their lender, according to industry and Whitehall figures.
Banks will be allowed to set the interest rate for the new loans, although the rate is likely to be capped at about 15 per cent, with bankers concerned that any artificially low state-mandated rate would in effect wipe out all other small-business lending.
Back in the spring, chancellor Rishi Sunak scrambled to set up several lending programmes for companies hit by the Covid lockdown to prevent a wave of insolvencies as the economy was put into the deep freeze.
They were originally designed to end in September but have already been extended until the end of January.
Although the worst economic effects of the pandemic are hoped to be over next year, ministers are still braced for lingering damage to the economy far into 2021 as Covid prevention measures will remain in place until the vaccination programme is well under way.
Officials are concerned that many small businesses will still be severely weakened and struggle to obtain necessary financial support.
It is also hoped that the money will support smaller businesses that want to invest and grow as they seek new markets after Brexit.
Access to the new loans programme is expected to be much more stringent than the bounce back loan scheme, which has supported £42bn of lending by banks to the UK’s smallest businesses.
Light-touch checks on borrowers under the scheme allowed banks to speed up lending, but have sparked concerns over fraud and default that could cost the taxpayer billions of pounds. The government has fixed the interest rate for bounce back loans at just 2.5 per cent, with no interest or repayments for the first year.
The rules of the new scheme will be more in line with the existing Coronavirus Business Interruption Loan Scheme (CBILS), which has supported about £18.5bn in lending during the pandemic to larger SMEs.
This will mean more rigorous checks over a borrower’s creditworthiness. One of the more controversial elements will be the possibility of the reinstatement of a partial personal guarantee in the loans.
The use of personal guarantees, which can mean that some of the borrower’s assets are used as security, caused concern when included in the initial forms of CBILS in the spring.
But bankers argue that guarantees had been standard practice under similar schemes before the pandemic, and any new permanent loan facility should reflect more normal market conditions or risk distorting the lending market further.
Officials want the new scheme to be open to a wide range of businesses, and so are expected to set the lower end for loans at just thousands of pounds ranging to as much as £10m repaid over a six-year timeframe.
The scheme is also expected to support revolving facilities, such as overdrafts, and asset finance facilities.
The Treasury confirmed that the new scheme is expected to be rolled out from January next year in line with plans first announced by Mr Sunak in September’s “winter economic plan”.
“Our loan schemes have provided a lifeline to thousands of businesses across the UK — helping them survive this crisis and protecting millions of jobs,” it said. “We are working on a new, successor loan scheme and will provide more details in due course.”
As the terms of the scheme are still being finalised, it is also possible that the Treasury could extend existing loan schemes again to ensure that businesses have access to finance after the UK leaves the EU single market.
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