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Mandelson unveils multi-billion pound package to help small businesses

Sector: Central Government
Date Created: Wed 14th Jan 2009, 10:45:22
Source: 24 Dash
Link: http://www.24dash.com

UK – The Government unveiled a multi–billion package of measures aimed at unblocking lending to small firms, including loan guarantees and a new enterprise fund to help companies struggling to access finance.

Business Secretary Lord Mandelson said it was "crucial" that the Government acted now to provide help amid warnings that scores of smaller businesses were going bust every day.

The measures include a £10 billion working capital scheme, securing up to £20 billion of short–term bank lending to companies with a turnover of up to £500 million.

The enterprise fund will be worth £75 million, made up of £50 million from the Government and the rest from banks and will be available for small firms which urgently needed equity.

The Government also announced an enterprise finance guarantee scheme, securing up to £1.3 billion of additional bank loans to small firms with a turnover of up to £25 million.

The Federation of Small Businesses welcomed the announcements, but warned it was a "last throw of the dice" to unblock lending from banks to small and medium–sized enterprises.

Shadow chancellor George Osborne said the Government appeared to be offering a belated version of the £50 billion loans guarantee scheme floated by the Tories several weeks ago.

"Let us hope that they will properly implement this Conservative policy rather than a pale imitation, or else they run the risk of repeating the mistakes of their expensive temporary VAT cut and achieving nothing," he said.

Lord Mandelson said: "UK companies are the lifeblood of the economy and it is crucial that Government acts now to provide real help to support them through the downturn and see them emerge stronger on the other side.

"We know that some companies are struggling to secure the finance they need, not because of any failure in their business but due to the tougher credit conditions.

"That is why we have designed a package of measures addressing different forms of credit and providing real help for businesses."

Lord Mandelson also confirmed that the Government was discussing with trade credit insurance providers a Government scheme to help companies affected by reductions in their credit insurance.

Details of the announcements were posted on the Government's business links website, aimed at directing companies to the most appropriate form of support and help.

Lord Mandelson said the working capital scheme was a direct response to the constraint on bank credit available for lending to ordinary–risk businesses with a turnover of up to £500 million a year.

The Government will provide banks with guarantees covering 50% of the risk on existing and new working capital portfolios worth up to £20 billion.

The guarantee will secure up to £20 billion of working capital credit lines for companies, ensuring they were safe from reduction or withdrawal, said the Government.

In addition, the guarantee will free up capital which the banks must use for new lending as a condition of this scheme. This is lending that would otherwise not have been provided.

The minister said the enterprise finance guarantee aimed to help smaller, credit–worthy companies which might otherwise fail to access the finance they needed for working capital or investment finance due to the current tight lending conditions.

The Government will provide £1 billion of guarantees to support £1.3 billion of bank lending to smaller firms with an annual turnover of up to £25 million, which are looking for loans of up to £1 million for a period of up to 10 years.

The guarantee, available through high street banks, will apply to loans and can also be used to convert existing overdrafts into loans to enable businesses to free up their current overdraft facilities to meet working capital demands.

The Government also offered to invest in viable companies which had high levels of existing debt through a new GBP75 million capital for enterprise fund, which banks are contributing to.

The fund, to be managed externally, will provide long-term capital to businesses which have exhausted traditional forms of finance. Companies can then use this capital to invest in and grow their business.

The announcement followed a new raft of job losses or redundancy warning, including 500 at Barclays as part of a global cutback of 2,100 staff, the threat of 400 cuts at Nottingham City Council, up to 200 through the closure of a distribution site for high street giant Argos and the threat of more than 230 redundancies at failed clutch manufacturer AP Driveline, based in Leamington Spa.

The maker of the Aga cooker said it had reduced its workforce by around 400 jobs in the last year and shortened factory hours to cut costs, while as many as 2,000 City jobs were reportedly facing the axe after the merger of investment banking giants Merrill Lynch and Bank of America.

Union leaders are braced for further job cuts in the coming days and weeks as unemployment heads towards two million, with increasing warnings that the figure will top three million before the recession is over.

Lord Mandelson told a press conference at the Business Department in London that the crisis in the global economy was a credit one.

"Many companies are struggling to finance themselves because of the crisis in the banks. Their business models are not flawed, but the credit crunch has drastically reduced the amount of capital available, and banks have tightened their lending criteria.

"Today's package is designed to address this problem directly. The support package we are launching builds on the commitments we made in November's Pre–Budget report. It addresses the cash flow, credit and capital needs of businesses.

"We are offering specific solutions – not a blanket subsidy. We are delivering real help, targeting real needs. It will make a real difference to business, whilst preserving value for money for the taxpayer."

Lord Mandelson said the package offered real help to firms that needed it the most, not "slogans", adding: "It addresses the problem at the heart of the credit crunch – credit for viable businesses.

"UK businesses are the backbone of our economy, so it is vital the Government acts now. We are absolutely determined to do everything we can to support viable companies through this global downturn."

Lord Mandelson said today's announcement should help restore confidence among banks, businesses and consumers.

He told BBC Radio 4's Today programme: "We saved the banks from collapse last autumn. We know that it is a struggle for them to get back on their feet and get back to normal lending.

"This will not happen overnight, but it will happen. But it will only happen with assistance from the Government."

Lord Mandelson confirmed that Chancellor Alistair Darling was still in discussions with banks on further measures to restore normal lending conditions.

And he added: "The schemes that are going live are to make it easier for the banks both to deleverage – to live down the excesses of the past – but also to sustain much–increased lending for the corporate sector.

"Both the initiatives going live will enable the banks to do so in a very specific and very focused and very funded way, unlike the Conservative proposals.

"It is a relatively small sum of taxpayers' money to get a much bigger benefit and advantage for firms that need continued access to lending or new lending in the future."

Lord Mandelson defended the Government's 2.5% temporary cut in VAT, insisting it was "too early to say" whether it had delivered the hoped–for boost to consumer spending.

"The VAT reduction is not simply for Christmas, we are talking about a cumulative impact month–by–month over the course of the year," he said.

"It will make a real difference to the spending power of the consumer on top of cheaper mortgages, cheaper commodities and therefore food."

Lord Mandelson told the news conference that no one anticipated the depths of the crisis that has hit the global financial system and the difficulty banks would have getting back on their feet.

The minister added: "We are in unique times and uncharted territory."

Lord Mandelson said the schemes announced were technically complex but he was confident that they would make a real and immediate impact in helping small firms access finance.

"We are talking about a very major programme to bring new working capital into existence.

"I am absolutely confident that they will produce real results for UK companies."

Lord Mandelson said the aim was also to give a "helping hand" to the banks although he added that he understood the frustration of taxpayers, industry and homeowners about the time it was taking to restore the banking system to normality.

The schemes unveiled were aimed at helping banks to do that more quickly and efficiently.

Lord Mandelson later introduced Mervyn Davies, the chairman of Standard Chartered Bank, who was appointed a new minister in the Business Department.

Lord Mandelson shook him warmly by the hand and said the Government would value Mr Davies's banking expertise and experience in helping to tackle the current financial crisis.

"He will be doing extremely valuable work in promoting trade and investment, as well as using his own experience in helping the Government with the banking crisis."

Mr Davies, who said he voted Labour, said he was looking forward to his new role and was "very excited".