Fresh loans for businesses to be unleashed as recession looms

A new £6bn business loan scheme is to be given the green light by ministers within days, providing firms more cheap debt to survive the looming downturn.

Whitehall sources said a longer-term successor to the Recovery Loan Scheme (RLS) is expected to be signed off by the Treasury and the business department this week after the unveiling of the new state-backed lifelines was hampered by delays.

The loan guarantee scheme, dubbed by insiders as RLS2, will be less generous than its predecessor but aims to provide up to £3bn a year over at least two years as recession fears mount.

Approval of a final package will provide crucial financial help for businesses to cope with a downturn triggered by the cost of living crisis. The new loan scheme will allay businesses’ fears of policy paralysis in Westminster while the Conservative Party picks a new Prime Minister.

The first RLS offered a 70pc government guarantee for loans of up to £2m to small and medium-sized firms but ended on June 30, leaving businesses in need of more debt support in limbo. A Government source said the announcement had been held up by efforts to toughen up fraud protections following the loss of billions of pounds on Covid support.

Under the loan guarantee schemes, the Government has pledged to swallow losses on loans made to businesses in a bid to boost lending by banks. The new scheme is designed to be longer lasting after several iterations of business loans support since the pandemic hit.

Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said on a new scheme: “It must open soon and be promoted better by the banks than its predecessor which closed in June.

“As we head into more economic turmoil, having RLS in place could prove crucial. If lenders pull back on commercial lending as they did in 2008, RLS could be flexed up to be a lifeline.”

He said small businesses are reporting that available and affordable credit is “starting to dry up”.

Debt worth almost £80bn was issued under the initial Covid loan schemes but only £1bn was handed out under the RLS, the most recent figures show. However, demand for the state-backed loans is likely to rise as the economy is put under pressure by the cost of living crisis.

The Bank of England has warned to expect corporate casualties in sectors exposed to soaring fuel costs and a slump in consumer spending.

It warned of pressure building on finances in manufacturing, transport and household goods sectors as a growing number of forecasters predict a UK recession.

Economists currently expect the UK to suffer a contraction in the second quarter as family budgets are squeezed by the highest inflation rate in 40 years. The Bank of England is also bracing for GDP to fall in 2023 as a whole.

The National Audit Office estimates that almost £5bn was lost to fraud under the Bounce Back Loan scheme, which offered a 100pc government guarantee.

A Government spokesman said: “We’ve supported the economy throughout the pandemic, providing around £400 billion to help protect millions of jobs, and we continue to stand behind businesses including through government-backed loan schemes such as the ENABLE Guarantee scheme.

“We are working with lenders to see how we can best continue to support businesses.”