Business loan

UK government seeks to make Covid business loan scheme permanent

UK government officials are in talks with UK bankers to provide a permanent replacement for the various schemes that have helped banks lend to struggling businesses during the pandemic.

According to several people familiar with the talks, officials from the Department for Business, Energy and Industrial Strategy have been polling bank executives to get their views on how the new loan guarantee scheme should work.

The program is expected to focus on small and medium-sized enterprises that would otherwise struggle to find financing on affordable terms from their lending banks.

A person close to the talks said the focus would be on supporting the growth of UK businesses, including those in the northern “levelling” areas, rather than survival or recovery from the pandemic.

“There is a definite need for ongoing follow-up,” said a banking executive who had seen the questionnaire sent out by government officials. He added that the program should work alongside commercial loans rather than replacing them.

The government is presenting advice on the level to set the guarantee, whether personal guarantees would be needed and what kind of businesses should be eligible, bankers and officials say.

Ravi Anand, managing director of lender ThinCats, said there were “good policy reasons for having a permanent program, including to encourage lending beyond a provider’s normal criteria, to encourage growth and potentially the ESG behavior, as well as something that can be adapted quickly in the market in times of stress”.

The government has backed £77billion in bank loans over the past two years through a number of temporary schemes which gave banks a guarantee for any losses from borrowers unable to repay the money.

The rebound loan scheme was the largest of these, providing 100% guarantees for around £44billion in loans of up to £50,000 to 1.1million small businesses. It was designed to provide funds as quickly as possible, with only light checks on borrowers, which has since led to a number of cases of fraud and abuse.

Other programs included the Coronavirus Business Interruption Loan Program, which provided larger loans to larger businesses with a lower collateral percentage. These were replaced last year by the Recovery Loan Scheme, which guarantees four-fifths of a bank loan up to £10million and ends on June 30. More than £3bn has been lent by UK banks under the scheme, according to a senior industry executive.

A government official said there had been no decision on whether to continue with the new scheme, but added there was ‘acceptance’ that a permanent scheme would be needed in part as buffer against any future disruptive events. He added that the decision had to be approved by Treasury ministers.

Prior to the pandemic, the government offered a similar program called the Enterprise Finance Guarantee (EFG), which offered the lender a government-backed guarantee of up to 75%.

Officials told the Financial Times that the EFG was essential to help structure the huge state-backed loan programs and business support launched during the pandemic.

The Treasury declined to comment.