InsaneJournal

Government guarantees on business loans
How project Merlin worked
The key objective of the Project Merlin deal was to address the situation where lenders were not providing the funding needed by businesses, particularly small and medium sized businesses (SME’s).

Under Merlin, the five largest banks in the UK, Barclays, HSBC, Royal Bank of Scotland, Lloyds Banking Group and Santander agreed to make £190bn of finance available to UK businesses. Although the targets were actually achieved by the banks, the scheme was widely criticised as the targets included credit made available to companies but not used. This meant that banks could meet the targets by providing business loans and overdraft facilities to low risk companies who were unlikely to use them and defeating the whole point of making business finance available to the businesses that really need it albeit with an associated higher risk.

Benefits of the new scheme
Under the new initiative the government will guarantee up to £20bn of bank lending which in turn will enable the banks to reduce interest rates on these funds due to the reduced risk to them of lending.

The key part to this for the Government is to ensure the banks pass on the interest rate savings to businesses. It is expected that interest rates under this scheme for business loans will reduce by up to one per cent.

Critics have said the Government is still not doing enough to ensure UK businesses, particularly in the small and medium sized sector, have access to the business finance they need. Some have suggested the government should simply force the state owned banks to provide the funding needed to small and medium sized businesses to ensure the economy achieves positive growth and we don’t slip in to recession.

Key points for small and medium sized businesses
It’s important for all small and medium sized businesses to note that this guaranteed lending by the government does not change the lending criteria of the banks and they will take the same underwriting approach to this new scheme as they do with their normal lending on business finance.

This means that businesses seeking finance need to make their case for funding and satisfy the particular bank’s lending requirements.

A detailed business plan clearly explaining the business proposition, what the funds are needed for and how they are going to be used and repaid, along with financial projections and cash flows is a bare minimum essential requirement before the bank will consider advancing funds.

It is normally the case that a business will get one shot at this with the bank they are applying to and it is therefore crucial to get it right.

It is always advisable for small and medium sized businesses to seek professional advice and assistance when going through the business finance application process. This includes applications for business loans, business overdrafts and any kind of specialist business finance.

Long term funding requirements as well as short term funding requirements need to be considered to ensure the most appropriate and cost effective funding is in place.

Business Services UK are business finance specialists. For the best deals on business loans and commercial finance visit our website at www.business-services-uk.co.uk or call us on 0845 459 7304 and speak to one of our business specialists.

commercial loans