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Loan insurance 'could aid lending to SMEs'

Date Added: 11/06/2013  

Compulsory business loan insurance could be the key to encouraging greater lending to SMEs by banks, according to a new report.

Thinktank ResPublica's Risk Waiver publication suggests that lending is currently being held back by a lack of confidence on the part of both banks and businesses, resulting in a 25 per cent drop in business loans, and that a mandatory insurance scheme incorporating debt waivers may be the answer.

Recent figures from the government indicate that its Funding for Lending scheme is not yet seeing the success originally anticipated when it was launched as a way to make business lending attractive to both banks and companies, with net lending under the initiative falling by £300 million in the first quarter of the year.

Debt waivers, which are especially popular in the US, are written into loan agreements to guarantee that the lender waives or covers the loan if it cannot be repaid for certain reasons, rather than the borrower having to deal with the cost, offering a form of company debt help in the process.

This could work for consumer loans, although "a similar approach could be used by lenders and local enterprise partnerships (LEPs) with SMEs, which would then become much more attractive customers for credit", the report states.

ResPublica said it recommends that the government forms a working group with banks and LEPs to create a database for assessing the credit risk associated with small firms.

"This would be the first step in opening up business credit to new products like debt waiver and new opportunities like peer-to-peer business lending," it commented.

However, the proposals may be met with caution following the payment protection insurance (PPI) mis-selling scandal, which incurred billions of pounds of costs for lenders. 

The launch of a new form of insurance protection, whether it is for consumers, businesses or both, is likely to require much scrutiny to ensure the problems associated with PPI do not occur again.

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Posted by Miles Pritchard

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