UK will guarantee banks’ debt to boost SME loans

 
Tim Wallace
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GEORGE Osborne announced £20bn of guarantees to banks in an effort to cut borrowing costs for small and medium-sized enterprises yesterday.

He announced the “credit easing” idea in September’s conference speech, and has now made clear he hopes to cut SME interest rates by around one percentage point.

“We are making available £20bn for the national loan guarantee scheme, which sits within an envelope that could be as large as £40bn,” he told the BBC’s Andrew Marr.

A range of banks will participate over the next two years, boosting market confidence in them and so cutting the rate at which they can borrow.

Once the banks obtain funds at lower rates, they will be expected to pass the saving on to companies with a turnover of less than £50m.

City A.M. understands the Treasury does not want to guarantee SMEs directly, which would put taxpayers’ money on the line in if they go bust.

Under the proposals the Treasury will only pay out if a bank fails, which Osborne sees as highly unlikely.

“It could be a good short-term measure, provided the lower funding costs are actually passed on ,” Federation of Small Businesses’ Andrew Cave told City A.M. “But in the long-term, we need more funding sources and more competition among banks.”