U.K. government forces banks to lend to small businesses on the brink of collapse

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The U.K. government has been forced to step in and demand that banks lend to small businesses after a financial lifeboat struggled to deliver intended emergency funds, sparking fears that one in five small businesses might collapse.

Last month Chancellor Rishi Sunak had offered to cover 80% of the risk banks faced in lending sums of up to £5 million ($6.2 million). But many of the lenders tried to ply businesses with their own products outside of this scheme, charged eye-watering interest rates and insisted on collateral.

Late Thursday evening Sunak stepped in and strengthened the support package by preventing the banks from requesting personal guarantees for loans under £250,000

He said: “The government is … stopping lenders from requesting personal guarantees for loans under £250,000 and making operational changes to speed up lending approvals. The government will continue to cover the first 12 months of interest and fees.”

Mike Cherry, national chairman of the Federation of Small Businesses, said: “Time and again we’ve heard from members who’ve approached their bank seeking an emergency loan, only to be offered anything but.

“They were promised interest-free, fee-free, government-backed support from banks, but, so far, the process for securing it has proved nightmarish for many. No one should be profiteering from these loans, which are not standard commercial transactions, but survival mechanisms.”

Read: U.K. government unveils package to pay self-employed 80% of income, but the money won’t be available until June

More than £90 million in loans to nearly 1,000 small and midsize businesses have been approved under the government’s Coronavirus Business Interruption Loan Scheme (CBILS) since its launch last week.

But Sunak said he is extending this so that all viable small businesses affected by the COVID-19 pandemic, and not just those unable to secure regular commercial financing, will now be eligible should they need financing to keep operating during this time.

Jonathan Geldart, director-general of the Institute of Directors lobby group, said: “These are sensible, welcome measures, and should clear the way for more businesses to access the money they desperately need.”

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Sunak also unveiled a new scheme aimed at helping bigger businesses.

It will provide a government guarantee of 80% to enable banks to make loans of up to £25 million to businesses with an annual turnover of between £45 million and £500 million.

In the U.S., a $350 billion forgivable loan program designed to ensure that small businesses do not lay off employees was part of the $2 trillion coronavirus stimulus package passed late last month. Some researchers have estimated that the federal government might need to supply up to $1.5 trillion in liquidity to businesses that employ 500 or fewer people if the coronavirus emergency were to last three months or more.

Said Chancellor of the Exchequer Sunak of the newly unveiled U.K. program: “This is a national effort, and we’ll continue to work with the financial-services sector to ensure that the £330 billion of government support, through loans and guarantees, reaches as many businesses in need as possible.”

Carolyn Fairbairn, director-general of CBI lobby group, said: “The chancellor’s measures are a big step forward. They will help deliver cash faster to firms battling for survival in the headwinds of the pandemic.”

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