Chancellor’s proposed 100% guarantee on small business loans lacks commercial sense

Chancellor Sunak

With the Chancellor likely to announce a new scheme offering 100% guarantees on loans for up to 1million micro-SMEs, Greg Taylor, Partner at MHA MacIntyre Hudson says SMEs need grants not more debt

The Chancellors’ new plan is unlikely to help SMEs. The kind of micro-businesses being targeted need grants, not to be saddled with more debt that they can’t afford, and that will potentially stagnate their growth. In addition, if the criteria for the loans is the same as for the current Coronavirus Business Interruption Loan Scheme (CBILS), then many micro-businesses still won’t qualify for funding.

“During the last recession of 2008 lenders found recovering funds they’d lent under government guarantee via the EFG (Enterprise Finance Guarantee Scheme) quite testing, so increasing the guarantee won’t be enough on its own to encourage banks to lend more.

“Relaxing some of the lending terms for government-backed loans to smaller businesses would be a better option than a 100% government backed guarantee. This should be coupled with a more uniform set of criteria, so SMEs aren’t faced with such a lottery on how “their bank” interprets the rules compared to a competitor bank.

“Loans should be repayable over 10 years, rather than a maximum six, to give UK SMEs a better chance of recovering at their own pace and repaying these loans, which ultimately are debts, not grants, and so have to be repaid. The economy as a whole would benefit more if longer terms were available on these CBILS loans.”