By Max Clarke

Lending under the Government's small business lending flagship the Enterprise Finance Guarantee (EFG) scheme has fallen a further 5% in the last quarter according to Aldermore, the new British bank.

Lending to SMEs under the EFG scheme dropped from £149m in Q2 2010 to £141m in Q3 2010. Lending under the EFG scheme has now fallen by 35% in the last year from £217 million in Q3 2009.

Aldermore says one worrying aspect about the scheme is that it is failing to get funding to SMEs in those regions of the UK that are most exposed to public sector spending cuts.

During Q3 2010, the amount of funding received by Northern Ireland SMEs fell by 56% from £3.2 million to £1.4 million. The North East saw a fall of 17% from £6.7 million to £5.6 million and funding to Welsh SMEs dropped 12% from £6.3 million to £5.5 million.

According to the ONS, the public sector in the North East accounted for 32.2% of the total workforce, in Wales that figure is 32.9% and in Northern Ireland 30.8% of the total workforce is employed by the public sector. These figures are significantly higher than the UK average of 19.5% (see table below).

Phillip Monks, CEO of Aldermore says: "With so many SMEs unable to secure credit from big banks, the continuing decline in lending through the EFG scheme needs to be reversed."

"It is particularly worrying that certain regional economies are suffering some of the greatest falls in funding. These areas are amongst those with the highest reliance on public sector jobs in the UK."

"EFG is a great scheme - it has been an excellent way of making extra capital availableto fund small businesses. Unfortunately, amounts actually lent under the scheme have declined over the last year."

The Government has recently announced changes to the EFG scheme that may have made it less attractive to bigger banks. The Government's guarantee of lending under the EFG is capped at 9.75% of total funds lent out by each bank. The cap on the guarantee is set to be reduced even further to 9.225% (from April 1 2011).

Says Phillip Monks: "Rather than reducing the EFG guarantee for lenders, increasing the guarantee is one way the Government could encourage the big banks to lend more to small businesses."

"If the Government were willing to underwrite a larger proportion of the EFG loans, then more loans might be written."

"As a bank that is focused on SME lending and which is very well capitalised, Aldermore doesn't need any enticements to lend to small companies but clearly the EFG guarantee has helped encourage other banks to provide more funding to SMEs."

"The Government could also consider reducing the fees that small businesses that are charged for using the EFG pay to the Government."

Loans made through EFG scheme during Q3 2010 and the % of workforce employed by public sector*

(1): Total amount of loans offered through EFG scheme during Q2 2010
(2): Total amount of loans offered through EFG scheme during Q3 2010
(3): % change in loans offered between Q2 and Q3 2010
(4): local workforce employed in public sector*

(1) £149m
(2) £141m
(3) -5%
(4) 19.5%

Northern Ireland:
(1) £3.2m
(2) £1.4m
(3) -56%
(4) 30.8%

North East:
(1) £6.7m
(2) £5.6m
(3) -16%
(4) 32.2%

(1) £6.3m
(2) £5.5m
(3) -13%
(4) 32.9%

*figures from ONS