100% Guaranteed Loans: What does the Chancellor’s Announcement mean for SMEs?

29th April 2020

Chancellor of the Exchequer Rishi Sunak announced on Monday that the Treasury will begin to offer 100% guarantees on loans given to small businesses up to the value of £50,000. The Government will not, however, extend the offer to all loans offered under the Coronavirus Business Interruption Loan Scheme (CBILS), citing the need to balance the needs of small businesses with the risk to the tax payer.

The new extended guarantee system is designed to remove the risk to banks when loaning money and therefore speed up the approval rate of applications for small firms most in need of emergency cash. The loans also follow previous CBILS rules in that no interest will be charged for the first 12 months, although firms will now only have to prove their viability prior to the crisis, rather than post-Coronavirus; something which many struggled to do given the uncertain future ahead.

This is a hugely positive step in the short-term for small and micro businesses who are in desperate need of survival capital. For businesses with more than around ten employees, however, this is likely only to cover a month or two of expenditure and with no end in sight for lockdown, much more support will likely be needed. The CBILS has come under massive scrutiny both for who is guaranteeing the cash and the time it takes to process the payments.

This addition will undoubtedly save many businesses in dire need of funds, but it will not be a game-changer for most. This is especially true of early-stage loss making companies or those without the requisite three years trading. This is where private finance is going to be more important than ever. Investors are starting to realise that there are opportunities out there to support great businesses – sometimes at reduced cost. So, while debt may be more available than ever before, equity finance will remain a key route to saving firms from going under and, crucially, helping some to grow.

Private investors should continue to make use of other tax-efficient Government schemes – such as the Enterprise Investment Scheme – that are crucial to safeguard small firms in the UK. The EIS is one of the UK Government’s most successful initiatives in terms of driving investment into high-growth early-stage companies. It has helped produce some incredible business successes that otherwise may not have got off the ground due to the reluctance of banks to lend to these firms.

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