Businesses (Financial Support)

Part of Oral Answers to Questions — Prime Minister – in the House of Commons at 12:32 pm on 14 January 2009.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 12:32, 14 January 2009

With permission, I shall give the House details of the business support measures that the Chancellor announced in the pre-Budget report in November, which are going live today.

The crisis in the global economy is above all a credit crisis. 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 the problem directly.

The support package that we are launching today builds on the commitments that 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, and targeting real needs. The package will make a real difference to business, while preserving value for money for the taxpayer.

First, the working capital scheme is 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 per cent. of the risk on existing and new working capital portfolios worth up to £20 billion. The guarantee will secure £20 billion worth of working capital credit lines for companies, ensuring that they are safe from reduction or withdrawal. 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. No other proposed scheme of this kind would free up such additional capital or create new lending specifically for the use of UK companies. A charge will be made for the Government guarantee and although the risk will be relatively low, the Government will make prudent financial provision of £225 million in case of loan defaults.

Secondly, through a new enterprise finance guarantee we will support up to £1.3 billion of bank loans to companies with a turnover of up to £25 million. These will be smaller viable creditworthy firms that are struggling to access the finance they need because of the additional risk created by the downturn. Under the scheme, businesses will be able to borrow a maximum of £1 million, of which the Government will guarantee 75 per cent., to cover working capital or investment. They will also be able to convert their overdrafts into loans to free up their existing facilities. Banks will have to certify that each loan is additional to what they would otherwise offer. The scheme will operate on a first come, first served basis within the allocated proportion of the sum for each participating bank.

Thirdly, we are establishing a new £75 million fund to help viable small businesses with high levels of existing debt to raise long-term finance. The capital for enterprise fund brings together £50 million of Government funding with £25 million from major banks. Run by professional fund managers, the fund will provide equity investment to companies with viable business models that have exhausted traditional forms of finance. They will be able to use the capital to restructure their balance sheets and invest for growth.

Lastly, the Government want, if possible, to address concerns about the operation of credit insurance, which have emerged since the pre-Budget report. This insures suppliers of goods to other companies against payment default by those companies for the goods provided. As my right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform announced, the Government are discussing with trade credit insurance providers a Government scheme to help companies affected by reductions in their credit insurance. There will be a further announcement on this as we progress.

This overall package of measures offers not slogans, but real targeted help from today to those firms that need it most, while ensuring the banks are not insulated from normal commercial risk. 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 that the Government act now. We are absolutely determined to do everything we can to support viable companies through this global downturn, and I commend this statement to the House.