Last Sunday’s papers contained a number of articles and letters about the new government loan guarantee schemes or at least the existing schemes and how they are being implemented by the banks.
The letters, in particular, were almost unanimous in their criticism of the banks, and for that matter the government, for lording a scheme that to all intents and purposes, is going to be of no use to the people who really need it.
The problem is that the loan guarantee scheme, albeit massively underwritten by the government to protect the banks (again), is being administered by the banks in the most risk adverse manner.
As I understand it, the banks were given considerable licence as to how they implement the scheme and who should and should not be eligible or considered, subject to the legislation relating to the qualification criteria.
One aspect of the scheme, in considering a loan for either an existing business or a new start up, relates to the question of security. The banks are insisting in all cases, from what I understand, that despite the fact that they are only exposed on the loan for 20p in the pound, that lenders use up all their security before being eligible for a loan. This means a small businessman, with some equity in his or her house, would have to be prepared to use this as collateral against the new business borrowings before the banks will take any risk. Understandably, at a time when business is under considerable pressure, this is not something that people want to do.
What I find ridiculous about this situation comes down to three main points:
1. Correct me if I have misunderstood this, but these are the very same banks that we the tax payer, en masse, have taken a massive risk with in bailing them out of the mess that they have got into. These bankers, who also have homes with plenty of equity, have seen their businesses provided with money by us on an unsecured basis.
2. These are the very bankers, who have shown such extraordinary mis-judgement in running their own business and are now being given the responsibility for administering these new loan schemes and deciding who should receive the money. Frightening.
3. This is really the wrong type of finance for many businesses. What is needed at the moment is
I applauded the idea of an extension of the loan guarantee scheme and making considerably more funds available through it. What really concerns me is the way it is now obviously being administered. Whilst I don’t want to create unnecessary levels of bureaucracy, I think it would have been a far better idea to create some form of new body, independent of the banks, to administer these loans, to really help small business, and not leave it to bankers. Bankers, from my experience, simply don’t understand business. They have never been in business, have a corporate mentality, and just follow rules and forms.
A new entity could have started with a blank piece of paper and really helped the small business sector.