Reforms to the Enterprise Finance Guarantee scheme
Introduction Good morning. It’s a real pleasure to join you for your conference today. I would like to thank the Community Development Finance…
Introduction
Good morning. It’s a real pleasure to join you for your conference today. I would like to thank the Community Development Finance Association for inviting me, and HSBC for hosting this event.
I think community finance is an idea whose time has truly come. Backing enterprise by providing finance to those who struggle to get credit from mainstream lenders meets a vital need.
If we are to spread economic opportunity to disadvantaged communities, we must ensure that their start-ups, small firms and social enterprises can attract finance.
And if Britain is to achieve sustainable, long-term economic growth, it is essential we unleash the can-do, enterprising spirit that is found among people from every walk of life.
A budding entrepreneur with a bright idea should not be held back by their social circumstances. We simply cannot afford to waste that talent.
So as a Government we are absolutely committed to dismantling the barriers that sometimes stand in the way.
That’s why we are reforming the Enterprise Finance Guarantee scheme. We want to see more community finance bodies using it to increase the number of business loans they make.
I am sending new guidance to every enterprise CDFI in the country, setting out the details of the scheme, to encourage take-up. I will also be inviting them to bid for funds from the Regional Growth Fund.
CDFI performance
We are committed to helping the community finance sector flourish and grow - because you have a vital role to play in backing enterprise and tackling economic and social disadvantage.
Your strong roots and in-depth knowledge of your local communities means you can identify and back viable businesses - which mainstream lenders, with their generic criteria, may deem too risky to fund.
That means new companies, new jobs, and new economic opportunities in the areas that need them most.
In fact, as many of you will know, an evaluation commissioned by my Department found that 6,500 outstanding loans had created or safeguarded over 1,650 businesses, and over 12,000 jobs. I am pleased many of you are using this research to inform your future strategy.
The report published today, Inside Out, shows that, in 2009/10, the sector lent £187m to businesses, social enterprises and charities; and there are outstanding loans currently worth £461m.
These findings give me great confidence for the future. They are a real testament to your achievements in backing enterprise, and boosting opportunity, for disadvantaged areas and people.
Reforms to the EFG scheme
The results show that micro-lending really works - helping under-represented groups to fulfil their entrepreneurial potential. But this part of the market has not grown as much as other areas of community lending.
That’s why this Government wants to help you expand, and reach out to more people who have the ambition and drive to set up their own small business.
So, today, I want to highlight the reforms we are making to the Enterprise Finance Guarantee scheme, in order that you can use it to generate more funding and increase the number of loans made to start-ups and SMEs.
As some of you will know, the EFG supports lending to viable small firms that lack the collateral to secure a normal commercial loan, by giving the lender a Government guarantee. Indeed, some community lenders are accredited to operate the scheme.
But we understand that, given the riskier nature of the loans you offer, a greater degree of security is needed.
So, to encourage more community funding bodies to become accredited EFG lenders we have increased the level of protection the scheme offers.
From next year the Government will, for each lender’s portfolio, cover defaults of up to 20 per cent on the first £1 million of loans - up from 13 per cent currently.
As many community lenders have only moderate budgets, this change substantially increases the proportion of the loan book backed by Government guarantee.
It means that organisations will be able to make more loans - making it easier for small firms to get the finance that’s so critical to their success.
We will be inviting applications from appropriate lenders, who want to operate the EFG scheme, from April 1 next year, with a further application round next October.
New guidance for CDFIs
But I would like to emphasise that CDFIs can also borrow money through the Enterprise Finance Guarantee - and are exempt from the premium that borrowers ordinarily pay.
Unfortunately, just one loan has been made to the sector so far. So I am issuing guidance to every enterprise CDFI to raise awareness of the scheme, and to encourage them to exploit its full potential.
We would like more lenders to use the scheme to increase their available funds, and consequently the number of loans they can make to small firms.
These changes should give community lenders the security they need to expand their loan books, and boost the numbers of fledgling businesses they support.
They should also give the sector the confidence to grow in scale and reach, fuelled by capital injections from private sector funders.
We want you to be ambitious for the future and build on your outstanding track record.
Regional Growth Fund and Big Society Bank
That’s exactly why I am inviting community finance bodies to submit bids to our new Regional Growth Fund.
Indeed, my officials are working closely with you, Bernie [Morgan, CDFA chief executive], to encourage a coordinated bid that may help address some of the funding issues for the sector.
The Fund, worth £1.4bn over three years, will focus on helping those areas currently over-reliant on the public sector for employment.
To receive funding, projects will need to show they can make a lasting difference to the local economy, helping it to diversify and become more resilient.
All successful programmes will have to meet the minimum bidding threshold of £1m; generate private sector investment; and create long term, sustainable, private sector led growth and employment.
But beyond these criteria, bids are welcome from any form of private-public partnership - and that includes social enterprises such as CDFIs. You can apply to the fund directly, or as part of a larger scheme, for example with a Local Enterprise Partnership.
We have also pledged to set up a Big Society Bank, funded with money left in dormant bank accounts, to reinforce the social investment market. Community lenders will be among the main beneficiaries of this innovative fund, so I urge you all to work with us as we develop it.
I believe the Regional Growth Fund, and the Big Society Bank, will be a powerful engine in generating the momentum needed for sustainable, rebalanced economic growth - across the economy and in communities around the country.
That ambition fits perfectly with the work that you all do. And it underscores this Government’s broader efforts to increase economic opportunity and tackle entrenched disadvantage.
Tackling disadvantage
Our New Enterprise Allowance will support unemployed people who want to set up their own business in those vital early days.
The scheme offers benefits for six months, along with mentoring and start-up loans worth up to £1,000, as they strike out on their own.
We want to give a helping hand to people inspired to work for themselves - especially those groups who face particular barriers to starting their own business.
The New Enterprise Allowance is an innovative programme that will help people facing disadvantage to move off benefits and forge a better future.
It is reinforced by our clear support for social housing tenants who want to set up a business at home.
Research suggests that up to 96% of housing associations require tenants to get written permission to work from home. Many tenants believe requests will be turned down.
Currently, only 22,000 of the 200,000 small businesses run from home are based in social housing. That means only 11% of small businesses in the 1,000 most socially deprived areas are based at home - compared to 36% in the rest of the country. This has to change.
So we believe there should be a presumption in favour of being able to run a business from social housing. And we are calling on councils and housing associations to get the message out to their tenants loud and clear that they will support enterprise.
In future, social landlords should use their common sense and, wherever possible, give the green light for residents to work from home.
This clear support from Government is important for the kind of start-ups and micro-businesses backed by the community finance sector.
It creates the right conditions for more small businesses to flourish - with your help.
Conclusion
Clearly, you have a critical role to play in this nation’s economic future - in galvanising growth and tackling disadvantage. And, as today’s report shows, you have the skills, the know-how and the imagination to meet that challenge.
So I would encourage you all to explore the Enterprise Finance Guarantee. Consider how you can use it to expand your operations, and increase the number of businesses you support.
We want to harness the tremendous power of the community finance model - and use it to help fuel a transformation in our economy, and in our communities. I know you do too.
If we work together in partnership, I am confident we will achieve that shared ambition.