Financing: Leg up for small firms: Changes in the loan guarantee scheme are seen as a chance for the banks to mend fences

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THE SMALL business trade associations have hailed the Budget as the best they could expect in the circumstances.

In particular, there is general agreement that the widening of the scope of the Government's Small Firms Loan Guarantee Scheme is potentially the most significant change.

Tim Atterton, the executive director of Durham University Business School's small business centre, said the decision to reduce the premium for fixed-rate loans was especially important. However, he added that 'time alone' would tell whether the move would have the desired effect of encouraging expansion within companies suffering from a shortage of cash and weak balance sheets.

Certainly, business advisers have not been enthusiastic about the scheme in the 12 years since it was established. One accountant advising owner-managed businesses in the Midlands said it was badly marketed by the banks and tended to be treated as a last resort.

Others claim that businesses are put off using it because they have to apply via the banks - the very institutions that are not offering other forms of finance - and because the premiums have been so high.

These have now been reduced to 0.5 per cent on the whole loan for guarantees on fixed-rate lending and to 1.5 per cent on the whole loan for guarantees on variable-rate lending, from 2.5 per cent for both types of loans (although that was charged on the guaranteed portion of the loan and is equivalent to 1.75 per cent on the whole loan). And this, combined with increasing the proportion guaranteed from 70 to 85 per cent and the maximum loan from pounds 100,000 to pounds 250,000, will no doubt make it more attractive.

As Mr Atterton said, Norman Lamont 'has thrown a challenge to the banking sector'.

So far, the banks have professed themselves eager to respond, although they point out that the details, when they are released, will have to be closely analysed to help with the fixing of interest rates.

Midland claimed to have been a consistently strong supporter of the scheme, lending more than pounds 150m to 7,000 customers since it began. It said it would review the rate of interest applied to new loans so that the margin reflected the lower risk.

Brian Pearse, the bank's chief executive, said the changes 'supplied a key platform for partnership between the government banks and businesses'.

Derek Wanless, his counterpart at National Westminster - the largest small business lender, with pounds 11bn on loan to a million customers - agreed. The changes had substantially enhanced the appeal of the scheme, he said. They would encourage firms to seek the finance they required to expand as the economy moved into recovery.

Together, these two banks account for about two-thirds of the guarantee scheme. But others say they are also keen to help the scheme gain fresh momentum.

However, bankers point out that the scheme only really works at the margin, since it helps those companies that cannot gain other finance, because they lack either security or a track record. And NatWest said its research suggested that what was holding back business was not shortage of funds but a lack of orders.