The 'new' Loan Guarantee Scheme which is supposed to free up business lending is of course more PR than AU (actually useful). I haven't been able to find precise details of the scheme but a similar one has been in existence for 20 years or more, when I was a lending banker actually trying to lend the things. The supposed 1% discount is a nonsense.
The traditional scheme has several weaknesses for business:
- It requires repayment over a relatively short term, 2-5 years, making it unsuitable for many large investments
- Banks can still require security for any unguaranteed portion of a loan
- Interest rates can be flexible, providing longer term risk to affordability
- The Loan Guarantee Premium is passed on to the customer adding further cost to the loan
There is insufficient detail of the new scheme to see what if anything is improved but the trumpted 1% saving on interest cost over a normal loan is simply not real. Banks will credit profile a customer through his application and come up with whatever rate they want to earn the profit they choose from that piece of business. It is pointless saying that if they would have lent at 7% they will now lend at 6%. Banks are far more devious than that.
And all of this slightly misses the point. Short term loans may help some businesses, but not that many. If I want to buy a piece of machinery to last 20 years I am unlikely to be able to afford to buy it over three years. Another flaw in the scheme is that the taxpayer now takes the risk on the banker's decision but gets none of the reward when it goes well. What is needed is a national investment scheme, preferably targeted at social enterprise but able to help all small and medium business which returns a share of any resulting profit to a central pot. This is proposed in the Unofficial Big Society Green Paper (www.bigsocietygreenpaper.org) and would really help business to create jobs whilst potentially helping to solve other problems.
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