17 February 2004

Graham Review of the small firms loan guarantee

Teresa Graham, asked by the Chancellor to carry out a review of the Small Firms Loan Guarantee (SFLG), today published a document calling for submissions from businesses on the effectiveness of the scheme.

Publishing the document, Ms Graham said:

“The Government has asked me to review the Small Firms Loan Guarantee, to ensure that it is working effectively and that, through SFLG and other interventions, the Government is doing all that it can to help start-ups and small firms overcome the obstacles that they face when raising finance.

“I am delighted to have the chance to look into the role and effectiveness of the SFLG, which I know to be of great value to many businesses that would otherwise struggle to raise finance. The issues raised in these submissions will form the basis of discussions with a wide range of stakeholders, including lenders, small firms and their representative organisations, accountants, business support providers and local and regional bodies.

“I look forward to engaging with all stakeholders over the next few months and I warmly welcome submissions to the Review.”

Notes for editors

1. The SFLG guarantees loans from banks and other financial institutions for small firms that have viable business proposals but which have tried and failed to get a conventional loan because of lack of security. Loans are available for periods of between two and ten years on sums from £5,000 to £100,000 (£250,000 if the business has been trading for more than two years). SFLG guarantees 75 per cent of the loan. In return for the guarantee, the borrower pays DTI a premium of 2 per cent a year on the outstanding amount of the loan. The commercial aspects of the loan are matters between the borrower and the lender.

2. Since the scheme’s launch in 1981, over 88,000 loans have been guaranteed, worth approximately £3.5 billion in total. Changes to the eligibility criteria made in April 2003 have led to an increase in use of more than 40 per cent. More than 4,000 loans have been guaranteed since then with a value in excess of £300 million, and the average loan size has now risen to around £69,000.

3. While SFLG continues to play a valuable role in supporting small firms in the UK, the Government is aware that the market in which businesses raise debt finance is more sophisticated now than when SFLG was first introduced, and wishes to examine its effectiveness in this changing market environment and ensuring that it remains as useful and practical as possible for both lenders and borrowers.

4. The Graham Review, announced in Bridging the Finance Gap (HM Treasury and Small Business Service, December 2003), has been asked to work closely with the main SFLG lenders and to examine, and if appropriate make recommendations regarding:

the structure and rules of SFLG and their appropriateness to the scheme’s effective operation; and
whether SFLG, as the Government’s principal intervention in the supply of debt finance to SMEs, is effective in tackling the barriers faced by start-ups and small businesses in the current market.

5. The review team seeks responses covering a wide range of issues set out in today’s document The Graham Review. All submissions should be sent to graham.review@hm-treasury.x.gsi.gov.uk by 13 April 2004.