New loan scheme welcome but needs to deliver
Less than four months since the announcement of his 'credit easing' programme at the Autumn Statement, the Chancellor has launched the National Loan Guarantee Scheme.
The NLGS aims to take one percentage point off the interest rate that SMEs pay on loans from banks. This is made possible by allowing the banks to borrow a chunk of money (£20 billion) from wholesale markets at a lower price, courtesy of a government guarantee, and then passing this lower cost on to SMEs.
Launching the scheme has involved tricky negotiations with the banks and the European Commission - the government deserves credit for getting the scheme off the ground fairly quickly.
Cutting the cost of credit is vital at a time when the economy is crying out for companies to invest and a very uncertain demand environment continues to discourage borrowing to support investment by SMEs.
Tomorrow we'll hear the latest OBR forecasts for the economy and it's likely that as at the time of the Autumn Statement growth will be heavily dependent on business investment.
We know that SMEs in particular are facing the most difficult credit conditions. EEF's Credit Conditions Survey has consistently shown a balance of companies reporting an increase in the cost of credit since the financial crisis - a balance that has been consistently worse for SMEs. In our 2012q1 survey a net balance of 10.2% of SMEs reported the overall cost of finance had increased, rising to 18% if we exclude those who didn't need to borrow.
And the bank-funded SME Finance Monitor has also shown that a considerable minority of SMEs (12%) would like to have applied for finance but did not in 2011 - with discouragement being a key factor holding them back.
Addressing the cost of loans is an important means of addressing this discouragement. But the challenge now is to avoid the mistakes of the past when good ideas in Whitehall were undermined by poor understanding on the ground.
The participating banks are in the main large organisations with networks of many branches across the UK. For the NLGS to be a success awareness of the scheme needs to be high in the branch network with bank staff not just able to deal with customer queries but actively promoting the scheme.
The government cannot pop up in every bank branch to encourage uptake of the scheme. But it needs to be doing all it can to promote the scheme by undertaking a major communications exercise, working with the banks.
This might grate with the government's crack down on advertising and marketing spend but it cuts to the heart of whether the government sees addressing access to finance as a key ingredient in generating the investment and growth the UK needs.
There are also opportunities for promoting the scheme that would not cost the government much money. For example, it already has a series of road shows planned for the latest round of the Regional Growth Fund - it would not be hard to amend the programme for these road shows to also include promotion of the NLGS.
Government needs to make sure that awareness and promotion of the scheme in the regions is strong and act accordingly if in coming months this proves not to be the case.