Banks must start lending to firms; Small Business.

Byline: NEIL WARWICK

IN the current climate, many companies, even those with a sound proposition are struggling to survive. The recession has been blamed on a collapse in the retail banking sector but it is small and medium-sized businesses which could suffer over the next few months as liquidity dries up.

It is perhaps understandable that banks are reluctant to lend to each other until the true extent of their own financial position is clear.

However, it is clear from previous recessions that a vital stimulus for the economy will be growth in the SME sector. It is therefore vital that banks start lending to businesses, even if they will not lend to each other.

While the Government has had its fair share of the blame for the recession, it has reacted quickly and prudently by unveiling a number of schemes designed to stimulate lending from the banks, such as the Enterprise Finance Guarantee (EFG ) and the Transitional Loan Funds (TLF).

The Enterprise Finance Guarantee is an extension of the concept of Small Firm Loans Guarantee Scheme (SFLGS). A company can now apply for a loan of up to pounds 1m and at the same time apply for EFG support which underwrites 75% of the loan, leaving the banks with only a 25% risk.

Launched in late 2008, the EFG scheme has understandably taken a while to gather momentum. After all, even the Government takes a while to put together a pounds 1.3bn scheme. As an interim measure, the Business Secretary Lord Mandelson launched the concept of transitional loan funds in November.

The funds have been created to encourage banks to support businesses that were viable, but were experiencing cashflow issues. A loan can only be granted on the provision that the bank cannot then withdraw facilities such as loans or overdrafts already in place.

The demand levels for the TLFs across the country have been high, indicating there is a marketplace for EFG. However, as the TLFs are administered by publicly accountable bodies such as the Regional Development Agencies (RDAs), like One North East and enterprise agencies (Entrust), they have been brought to the market more quickly.

Neil Warwick, partner at Dickinson Dees