Small firms: loan guarantee scheme

Updated: Aug 20, 2021

This definition must be read in a historical context.

As part of a package aimed at assisting small businesses the government has introduced a loan guarantee scheme. Qualifying businesses are those in the manufacturing and engineering sector with expansion plans for which finance is needed. The government will guarantee bank loans made expressly 3r such projects up to 70 per cent of the amount of the loan. It charges the borrower a premium of 5 per cent (originally 3 per cent), which is payable in addition to normal bank interest. When interest rates are high, as they have been since the scheme was introduced, this premium makes the total interest charge on the loan much higher than many projects can support – which accounts for the high business failure rate among borrowers and the noticeable lack of enthusiasm which the scheme has generated.

Reference: The Penguin Business Dictionary , 3rd edt.

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