Banks need an incentive to lend to Entrepreneurs and SMEs

Despite government rhetoric and its promotion of initiatives to encourage bank lending to entrepreneurs and SMEs the banks aren’t lending.

Merlin is a joke and contributes almost nothing to stimulating growth or an entrepreneurial culture in UK.

The root of the problem is banks’ inability to lend to businesses with few assets.

The Enterprise Finance Guarantee (EFG) scheme has not worked and nor will the new National Loan Guarantee Scheme (NLGS) initiative because lending because neither is underwritten by a Government guarantee, thereby exposing the banks to the full credit risks.

How different from the Small Firms Loan Guarantee Scheme (SFLGS) launched in 1981 to stimulate lending to SMEs, where the government provided a guarantee to the banks to support the lending.

The conception of the EFG and NLGS appears to convey a Government guarantee, however it doesn’t and this is why the banks are not lending under these schemes.

The SFLGS provided for a government guarantee to the lending bank of 85% of unsecured loans to qualifying SMEs who could borrow up to £250,000 (70% for companies under 2 years old).  During the 1980s – 90s the SFLGS contributed to stunning growth, helping to encourage entrepreneurs to set up and grow their business.

It was scrapped by Gordon Brown in 2006; a nail in UK’s entrepreneurial coffin, and such prescient timing.

Banks have the funds and the distribution networks, but they should not be exposing themselves to risky or unrecoverable debt and therefore are rightly wary of unsecured loans.

They need to be incentivised to lend to SMEs. Their loans need to be underwritten and the government is the only such source. Bring back the SFLGS.

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