Govt’s 100% guaranteed loans could be ‘wrong’ option – Old Mill

The Government has launched a new fast-track finance scheme providing loans with a 100% government-backed guarantee for lenders, although financial advisory firm, Old Mill, has suggested that if a business is unable to service a loan, it could be “wrong” for that business to borrow.

The firm questioned why the Government is lending as banks protect businesses from “inappropriate borrowing”.

Chancellor, Rishi Sunak, announced earlier this week that the new Bounce Back Loans scheme, which will provide loans of up to £50,000, would help bolster the existing package of support available to smaller businesses affected by the coronavirus pandemic.

However, Old Mill argued that if it is likely a loan won’t be paid back, the Government should instead issue grants, to spare banks and businesses owners the “stress of a complicated lending process”.

Old Mill director, Mark Neath, said: “More government support will obviously be welcomed by businesses, but the fact that we are even having the debate about the guarantee level demonstrates that loans in some cases are not the right tool for the job.

“If a bank has assessed a business proposition and concluded that affordability is not sufficient to repay the loan, then the bank should not lend, and it would be the wrong thing for the business to borrow.

“Now the Treasury is going to provide a 100% default guarantee for certain loans doesn’t alter the underlying facts that the business looks unable to service the loan and that borrowing would be the wrong thing. Even the Chancellor appears to acknowledge that loans are going to be made with little prospect of them being repaid.

“If that happened, such that the government guarantee was more likely than not going to be called upon, then it begs the question why not simply give a grant and spare the banks and business owners a lot of work, and ultimately stress and pain, to end up at the same place?”

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