New business loans to be released as recession looms

A new £6billion business loan scheme is due to receive the green light from ministers within days, providing businesses with cheaper debt to survive the impending recession.

Whitehall sources have said a longer-term successor to the Recovery Loan Scheme (RLS) is expected to be signed by the Treasury and the Business Department this week after the unveiling of the new state-backed lifelines was hampered by delays.

The loan guarantee scheme, dubbed by insiders RLS2, will be less generous than its predecessor but aims to provide up to £3bn a year for at least two years as recession fears grow.

The approval of a final package will provide businesses with crucial financial assistance to cope with a slowdown caused by the cost of living crisis. The new loan scheme will ease business fears of political paralysis in Westminster while the Conservative Party chooses a new Prime Minister.

The first RLS offered a 70% government guarantee for loans of up to £2m to small and medium-sized businesses, but ended on June 30, leaving businesses in need of increased support from the debt in limbo. A government source said the announcement had been delayed by efforts to tighten fraud protections following the loss of billions of pounds in Covid support.

Under the loan guarantee schemes, the government has pledged to absorb losses on business loans in an effort to stimulate bank lending. The new program is designed to last longer after several iterations of business loan support since the pandemic hit.

Craig Beaumont, head of external affairs at the Federation of Small Businesses, said of a new scheme: ‘It should open soon and be better promoted by banks than its predecessor which closed in June.

“As we head into more and more economic turmoil, the establishment of RLS could prove crucial. If lenders withdraw from commercial lending as they did in 2008, the RLS could become a lifeline safety.”

He said small businesses are reporting that available and affordable credit is “starting to dry up.”

Debt worth almost £80billion was issued under the initial Covid loan schemes, but only £1billion was distributed under the RLS, according to the most recent figures . However, demand for state-guaranteed loans is expected to increase as the economy comes under pressure from the cost-of-living crisis.

The Bank of England has warned to expect business losses in sectors exposed to soaring fuel prices and falling consumer spending.

He warned of growing pressure on the finances of the manufacturing, transport and household goods sectors as a growing number of forecasters predict a recession in the UK.

Economists currently expect the UK to suffer a contraction in the second quarter as family budgets are squeezed by the highest rate of inflation in 40 years. The Bank of England is also bracing for a drop in GDP in 2023 as a whole.

The National Audit Office estimates nearly £5billion was lost to fraud under the Bounce Back Loan scheme, which offered a 100% government guarantee.

A government spokesperson said: ‘We have supported the economy throughout the pandemic, providing around £400bn to help protect millions of jobs, and we continue to support businesses, including through government-backed loan programs such as the ENABLE Guarantee program.

“We are working with lenders to see how we can continue to best support businesses.”

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