Government-backed National Loan Guarantee Scheme to provide cheaper loans to small businesses

Businesses with an annual turnover of up to £50 million that take out a loan under the new National Loan Guarantee Scheme (NGLS) will receive a discount of one percentage point on the interest rate that they would otherwise receive from the bank.

The Government has said it will guarantee up to £20bn of unsecured borrowing by banks, enabling them to borrow at a cheaper rate and pass that saving on to business customers. It will guarantee around £5bn of borrowing by participating banks including Barclays, Santander, Lloyds and RBS in the first stage of the programme, with further allocations in future subject to demand. Aldermore, one of the new banks to launch in the UK following the financial crisis, has also agreed to participate in the scheme "on principle".

Businesses will remain subject to the banks' usual lending criteria, as the Government is guaranteeing the banks' financing rather than individual loans. However any UK business, including UK incorporated companies and branches of foreign incorporated parents with a "genuine business" in the UK, is entitled to apply and there is no centrally-set minimum loan size.

The Chancellor said that the scheme "delivered on the Government's promise" to help small businesses get access to lower interest rates.

"It's only because we've earned credibility with our deficit reduction plan that we have low interest rates, and it's only because of this scheme that we can pass the benefits of those low rates onto businesses," he said.

Although broadly welcoming the announcement, some business leaders commented that the programme would be unlikely to benefit smaller businesses that had trouble obtaining credit from banks in the first place.

"While credit easing is a step in the right direction, it is not a panacea for all the problems faced by businesses trying to access finance," said John Longworth, director general of the British Chambers of Commerce (BCC). "Since credit easing will be accessed via the banks, lenders will need to work harder to encourage firms, many of whom have been turned down for loans in the past, to consider applying for credit. Banks will need to ensure that their staff are able to fully explain these new loans, and that those business owners that aren't eligible for the scheme are advised of suitable alternatives."

The NGLS will be independently audited to ensure that banks are passing the full benefit of the guarantees to businesses, the Government said. In addition, participating lenders will have to submit quarterly reports containing data on the loans they have made under the scheme to the UK Debt Management Office, which is administering the programme.

Industry body the British Banking Association (BBA) said that its member banks were "committed" to providing businesses with the finance needed to develop and grow.

"Banks know it is their job to help viable firms be successful and also recognise the part they have to play in supporting the UK economy," the BBA said in a statement. "The UK's lending market is very competitive - and with support through schemes like the NGLS for even lower cost borrowing, now is a very good time for UK businesses to speak to a bank about their financing needs."