British Chancellor of the Exchequer George Osborne this week will spell out plans to channel more than ￡10 billion (US$15.4 billion) to small companies, a person familiar with the matter said.
Osborne will use three mechanisms to expand lending to companies that say they have been unable to borrow to finance the expansion of their business, said the person, who declined to be identified because the plans aren’t yet public.
The biggest would see the Treasury underwriting lending to companies, a practice already used by the EU’s European Investment Bank and Germany’s KFW Bank.
Photo: AFP
The plan, available to companies with less than ￡50 million in annual sales, would reduce loan costs to about 4 percent instead of the 5 percent currently provided by commercial banks, the person said.
The Treasury will guarantee money that is raised by banks from wholesale markets rather than each individual loan made to a company.
Banks rather than the government will chose to whom they lend, although the government will demand lenders use the program — which will run for two years — to make sure companies benefit, the person said.
The program will start operating early next year.
A wider program, which British Prime Minister David Cameron said last week would be “massive,” is aimed at boosting an economy in danger of returning to recession without compromising deficit-reduction efforts.
British banks have been reluctant to lend since the 2008 financial crisis or have done so at onerous interest rates to offset higher funding costs.
Osborne told supporters at the Conservative Party’s annual conference last month that he would put the Treasury to work to “direct money into the economy.”
He is expected to announce details of the plan in his economic statement to Parliament tomorrow.
The chancellor is facing growing pressure to stimulate growth amid a slowdown triggered in part by the debt crisis in Europe.
He has identified easier credit as a key policy lever to supplement the Bank of England’s ￡275 billion quantitative easing program, whereby the central bank creates money to buy government bonds.
Osborne is also set to announce a plan for a fund financed by the government and institutional investors to provide long-term loans to mid-cap companies.
Money would be available to companies as soon as next year, the person said.
A third approach will see the Treasury attempting to create a bond market for small and mid-sized companies, the person said.
Though business lending is ahead of targets agreed upon between banks and the government under a February deal known as Project Merlin, banks are lending about half as much to companies as they were in 2008, the British Bankers’ Association (BBA) said.
Banks loaned ￡449 million in April to small companies compared with a monthly average in 2008 of ￡991 million, the BBA said in its latest report on the sector, published in August.
Small and medium-sized companies account for 99 percent of all enterprises in the UK and almost 60 percent of private sector employment, according to the Federation of Small Businesses.
The credit guarantee program differs from an approach favored by the Treasury as recently as last week which would have seen it use its “AAA” rating to raise money in bond markets to finance the credit via the banks.
Such an approach would lead to higher government borrowing, something Osborne and Cameron are resisting, fearing it would risk Britain’s standing with investors.
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