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 26 July 2008
Department for Innovation, Universities and Skills (DIUS)
 
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Debt finance

Security and loan finance for SMEs with viable business plans

Purpose

To extend the availability of debt finance for SMEs that have viable business propositions but lack the necessary track record or collateral to obtain a loan.

How will this be achieved

By a dual approach of: (1) Guarantees; and (2) loan provision for SMEs – particularly, less well-established enterprises and those underserved by mainstream providers.

Why offer public sector support?

There is a need to reduce the barriers to access to finance for SMEs that have viable business proposals, but cannot secure a conventional commercial loan.

Finance providers often have little information about the entrepreneur, or about the business proposal being championed and have difficulty in distinguishing between high risk and low risk proposals. To mitigate this, borrowers are often required to provide collateral as security for loan finance. Research has shown that mainstream banks perceive the transaction costs of serving some viable business propositions (i.e. time to assess prospective clients, approve them and provide support) as too high relative to the returns. Businesses and entrepreneurs who cannot provide collateral, or demonstrate a track record, can be locked out of the loan market.

What will be offered?

Enabling the provision of loans up to £250,000 for those businesses with a viable commercial proposition. This will cover debt finance at an appropriate, risk-priced interest rate which reflects the nature of the borrowing enterprises.

Drawing on the pre-existing SFLG framework, the intervention includes offering partial Government underwriting of loans from lenders.

Who is Eligible?

This intervention will be aimed at SMEs – notably, start-ups and young businesses as they find it proportionately more difficult to raise finance than established businesses. It is these groups that are most likely to find it most difficult to provide collateral as security for loan finance.

  • SME definition applies for eligibility (<250 employees and an annual turnover of less than £5.6m).
  • most sectors of business are eligible other than those where there is no provision for State Aid.
  • primarily start-ups and SMEs under five years old.
 

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