Lending by Government’s loan guarantee scheme falls 23pc

The findings prompted business groups to call for Vince Cable, the Business Secretary, to read the riot act to the high street banks and slash the cost of the Enterprise Finance Guarantee (EFG) scheme.
Cable is understood to have raised the issue with both the Royal Bank of Scotland (RBS) chief executive Stephen Hester and Lloyds chief executive Eric Daniels during his first meetings with both men last week as both banks were mandated to support business lending as part of their government bail outs.
High Street banks lent £472m in the six months to September under the EFG, however, only £365m was lent from September to March this year. The total number of individual loans also collapsed, falling 18pc to 3,583 in the period.
The Federation of Small Businesses (FSB) said it was concerned that during Labour’s last months in power and since the General Election, the Government had not maintained enough pressure on the banks to lend.
FSB spokesman Stephen Alambritis said: “The EFG is expensive with too many conditions and the marketing of it between September and March was poor. The ebb and flow of it depends on ministers having their eye on the banks.”
The EFG, which is aimed at businesses that need to borrow but do not have enough assets to act as security, was extended by £200m to £700m in the June Budget, a decision that was welcomed by banks and small businesses.
Stephen Pegge, from LLoyds bank,  said: “Compared with the £500m limit, the lending run rate is faster than that, so we’re pleased they increased it. But there’s no truth in claims of any big slow down.”
However, Mr Alambritis said: “The extension of the guarantee must be coupled with better marketing. We think that Mark Prisk and Vince Cable should do spot checks themselves as the banks will try to bamboozle.”
He also called for the cost of the Government guarantee to be reduced, which he said was also discouraging businesses from applying.
To cover potential losses, the Government charges a premium over the lending bank’s commercial rate. This premium was 1.5pc points during 2009, but rose to 2pc from January 1.
“With base rates at 0.5pc, two points above base rates is enormous. In the context of the talk about unemployment and double dip recessions, it is important that the rate is reduced,” said Mr Alambritis.
Bank of England statistics show that in the year to April, total lending to small and medium enterprises was 3.8pc lower at £46bn in loans and £8bn of overdrafts.
Daniel Shear, corporate finance partner at BKL (London) said “I predicted in January of last year that the scheme may not be successful and unfortunately I may have been right.  The scheme replaced the old Small Firm Loan Guarantee Scheme which was not universally popular among the banks.
“If a lack of security is the only issue preventing a bank making a loan then the EFG scheme will allow the bank to make what is effectively a cashflow loan. However, banks still need to make their own commercial decision on the loan and be comfortable in making a loan that is 25 per cent unsecured. 
“Too many businesses are rejected for an EFG loan because they do not have a robust business plan supported by historical financial information and reasonable forecasts indicating how the loan will be serviceable.  Those that are able to ‘sell their story’ are often ineligible for an EFG loan under the lending criteria.
“After the write-off the banks have made in recent years they are being more strict on new loans, and given that 25 per cent of an EFG loan effectively remains unsecured it is perhaps not surprising that banks’ credit teams are not willing to sanction so many EFG applications.
“Finally, with low interest rates the government premium makes the overall interest rate charged on EFG loans relatively high at the moment and some eligible businesses may decide that alternative sources of financing would be cheaper for them.”
A Business Department spokesman said lending under the EFG reflected the progress of the credit crisis. “Demand for EFG peaked as small and medium enterprises sought working capital in response to the height of the credit crunch,” he said.
Peter Ibbetson, chairman of business banking at RBS, which has lent more than 40pc of all EFG loans, said: “We have not taken our foot off the pedal. It’s an important way for us to help businesses in difficult times.”
He added: “We are still seeing reasonable demand for it, although the demand is slightly less than when the recession was really hitting businesses.
“The sense we have is that the businesses that need the EFG when the recession hit used it so it is inevitable that it has fallen off a bit.”
However, Mr Ibbetson said he expected loan demand to strengthen this year.
Have you tried to borrow using this scheme, what was your experience?