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Government looks to encourage micro-lending to small firms

The government has set out plans to boost lending to small businesses.

Mark Prisk, the Business and Enterprise Minister, has unveiled a reform to the Enterprise Finance Guarantee scheme (EFG), the aim of which is to improve access to funding for community finance development institutions (CDFIs).

Mr Prisk said that the government will increase access to the scheme (guaranteeing 75 per cent of a loan to small businesses) for CDFIs, which typically make more risky investments than other lenders.

From April 2011, the government is to pay out on defaults of up to 20 per cent of each lender's Enterprise Finance Guarantee (EFG) portfolio on the first £1 million of loans, an increase on the present 13 per cent.

CDFIs are typically not-for-profit groups that lend to businesses and individuals that have been turned down by mainstream finance institutions.

The government is also to offer guidance to CDFIs that will help them take advantage of a little-used aspect of the EFG. Under this part of the scheme, banks can lend directly to CDFIs, so boosting their loan capacity, but the CDFIs themselves are exempted from the usual 2 per cent premium on the loans.

Mr Prisk, who was speaking to the Community Development Finance Association, invited CDFIs to bid for funding from the Regional Growth Fund.

The government is also developing a Big Society Bank to support the growth of the social investment market and to make it easier for social enterprises, including CDFIs, to access capital.

The Minister said: "I want to encourage people from all backgrounds to start their own business. Community development finance institutions are extremely important in supporting business in communities that need a boost in enterprise and economic growth.

"With changes to the Enterprise Finance Guarantee and our continued work on the Big Society Bank and Regional Growth Fund new opportunities are opening up for CDFIs to increase their loan base. CDFIs are well positioned to make strong bids for RGF support in line with the objectives of the fund."