Many small business borrowers are being excluded from the Government’s new flagship cheap loans scheme, because participating banks will not consider the smallest applications.
Lloyds Banking Group, Barclays and Santander have each set a minimum of £25,000 for loans made under the National Loan Guarantee Scheme (NLGS). Among the big banks, only Royal Bank of Scotland is catering for smaller loan applicants, announcing that it would consider as little as £1,000.
HSBC is not taking part, because it can borrow cheaply enough in the wholesale funding markets. Aldermore, the smallest participating bank, will only consider loans of more than £10,000.
George Osborne hailed the new scheme yesterday as delivering on his promise to help small businesses get access to lower interest rates. Participating banks will receive a government guarantee on £20 billion of their own borrowings, which will reduce the interest rate they pay. Part of this saving will then be passed on to small business borrowers.
The Treasury said borrowers under the scheme would pay 1 percentage point less interest than they would otherwise have done.
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Priyen Patel, a spokesman for the Federation of Small Businesses, welcomed the scheme, but said the floor on loan amounts was disappointing.
Banks are reluctant to offer loans to the smallest borrowers owing to the administrative costs and the difficulty of being able to prove the 1 percentage-point saving has been passed on in every case.
Lloyds said: “We are trying to keep things as simple as possible.” Loans below £25,000 also came under the Consumer Credit Act, which was an added complication, it said.
Barclays stole a march on its rivals, saying it had started making NLGS loans and offering the saving in the form of an upfront cashback lump sum. It said it hoped to reduce the minimum loan size to £10,000 within three months. RBS, which owns NatWest, said it would start offering the cheap loans in two weeks.
Small companies hoping to renegotiate existing loans under the NLGS could be disappointed, one banker said. Some will be allowed to refinance existing loans as NLGS loans, so long as there is some change, however minor, to the sum or term. But they would not necessarily see the 1 percentage-point reduction in the interest bill flagged by the Treasury as adverse changes in other factors used to price loans might offset the discount.
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Under a complex system of fees paid to and by the Treasury, the scheme is intended to be cost-neutral to all banks.
With only £5 billion made available in the first tranche of the scheme, banks are expecting strong interest. “The banks will burn through that amount very quickly,” said one banker.
Banks can typically borrow for five years at 3.5-5 per cent. The guarantee will reduce that cost to just 1.2 per cent, according to present bond market prices.