Government-driven funding for business comes under scrutiny

Regional Growth Fund

With banks accused of failing to lend to businesses, the government has said it thinks the current financing system needs to change to boost economic growth.

The Rowlands Review of 2009 identified a gap in the supply of finance of between £2m and £10m for UK SMEs looking to grow. In March this year, the Labour government announced a growth capital fund, backed by banks, to invest in SMEs looking for capital of between £2m and £10m. The eventual goal for the size of the fund was given at £500m.

One aim of the coalition government’s consultation with business, which closes in late September 2010, is to make it easier for companies ­– particularly the UK’s 4.8 million SMEs – to access a wider range of financing, including private equity investors and the bond markets, removing the need to rely on bank lending.

Announced in July, the £1bn RGF will fund projects that can show significant potential for sustainable growth and can create new private sector jobs. It is due to start in 2011 and last for two years.

The government is consulting businesses on the RGF until 6 September. It will reveal more details about it and on Local Enterprise Partnerships in a whitepaper later this year.

Priority will be given to applications from companies in areas that rely heavily on the public sector for employment. Businesses can partner with public sector bodies for bids, which should be for £1m or more, and former deputy prime minister Lord Heseltine will chair an independent approval panel for the fund.

Funding will depend on the needs of local areas. Examples of schemes likely to qualify for funding from the Department for Business, Innovation and Skills include programmes that develop skills and help bring people back into work; improve trans­port and housing; or encourage growth in the low-carbon and environmental sectors.

The government’s consultation seeks to make it easier for small- and medium-sized companies to get access to wider range of finance.

Enterprise Finance Guarantee Scheme

The Enterprise Finance Guarantee (EFG) scheme, which guarantees bank loans to small businesses, has been set at £700m and will run until March 2011.

The scheme – one of a series of initiatives to unlock access to the credit markets for SMEs – has proved controversial. Critics claim it got off to a faltering start due to confusion over the application process for loans.

Following criticism by businesses that banks were taking too long to decide on loans, the government has set a processing target of 20 working days for all major lenders in the scheme.

EFG supports lending to viable businesses in most sectors with an annual turnover of up to £25m seeking loans of £1,000 through to £1m. The government guarantees 75 percent of loans under the scheme.