Rishi Sunak backs down and offers small firms 100% loan guarantees

Britain’s smallest businesses will be offered 100% government-backed rescue loans following sharp criticism for the slow take-up of emergency bank lending during the coronavirus crisis.

In a climbdown following intense pressure on the government to improve its loan scheme to support cash-starved companies, the chancellor, Rishi Sunak, said small firms could access the new “bounce back loans” from next week.

Designed to provide smoother access to cash for small companies facing difficulty accessing existing government-backed lending, Sunak said businesses would be able to apply for “micro-loans” worth up to 25% of their turnover, up to £50,000.

It comes after the chancellor had faced intense pressure from business groups and Labour to boost the generosity of the government guarantee on its emergency loan scheme during the pandemic. However, Sunak stopped short of providing a 100% guarantee to big firms, saying taxpayers shouldn’t be exposed to the risks of large company failures.

Announcing the scheme in parliament, Sunak said small companies could apply for the new loans from high street banks from as early as next Monday.

“I know that some small businesses are still struggling to access credit. They are in many ways the most exposed businesses to the impact of the coronavirus and find it hard to access credit in the first place. They will need extra support to get through this crisis,” he said.

The new loans provide high street banks with a guarantee that the state will refund the bank for the entire value of the loan if a borrower is unable to repay, up from 80% on the government’s existing coronavirus business interruption loan (CBILS).

Although firms do not get government money if they cannot repay a loan, the scheme is designed to encourage banks to lend to firms when they might ordinarily turn down a loan application, because the state shoulders some of the risk.

The Treasury had previously resisted calls to offer 100% guarantees, believing that banks needed to share the risk with taxpayers. However, thousands of businesses across the country complained that the CBILS scheme was cumbersome and included too many financial hurdles that many businesses were unable to overcome.

Business lobby group the CBI, and the governor of the Bank of England, Andrew Bailey, had also suggested raising the state-backed guarantee to 100% to speed up the lending process.

Sunak dismissed calls for the government to offer a full guarantee on its emergency loan schemes, telling parliament: “We should not ask that ordinary taxpayers today and tomorrow to bear the entire risk of lending almost unlimited sums to businesses who may in some cases have very little prospect of paying those loans back and not necessarily because of the impact of the coronavirus.”

Source: Read Full Article