Some £20 billion of government-backed loans will be made available to small and medium-sized businesses through a new credit easing scheme.

Some £20 billion of government-backed loans will be made available to small and medium-sized businesses through a new credit easing scheme.

Four of the UK’s biggest banks have signed up to the National Loan Guarantee Scheme (NLGS), which will see guarantees on unsecured borrowing by Barclays, Royal Bank of Scotland, Lloyds and Santander.

The participating banks will pass on the entire benefit that they receive from the guarantees to businesses with a turnover of less than £50 million through cheaper loans.

Banking giant HSBC will not take part in the initiative.

Chancellor George Osborne says, ‘It’s only because we’ve earned credibility with our deficit reduction plan that we have low interest rates, and it’s only because of this scheme that we can pass the benefits of those low rates onto businesses.’

Small businesses that take out an NLGS loan will receive a discount of 1 percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme, the Treasury says.

The first tranche of NLGS guarantees is for a total of around £5 billion, with a minimum allocation per bank of £100 million, while the size and timing of subsequent tranches will be determined by demand.

Director general of the British Chambers of Commerce John Longworth says that the current economic challenges mean that the government must look at new and innovative ways of providing credit to viable firms.

However, he adds, ‘While credit easing is a step in the right direction, it is not a panacea for all the problems faced by businesses trying to access finance.

‘The National Loan Guarantee Scheme will make some loans more affordable. But it will not help the smaller, younger and high-growth firms that have trouble getting credit in the first place.’

Stewart Baird, founder of small business investor Stone Venture Partners, agrees that the smallest companies will largely not benefit from the scheme.

He says, ‘The banks remain highly risk adverse and this loan guarantee scheme will not change that. Credit easing is easy, credit giving is what matters. Companies need finance full stop, not just cheaper finance.

‘To me, this scheme feels as if it’s mollycoddling the banks rather than getting money to the high growth businesses that will drag the economy out of the hole it’s in.’