Recommendation 21

Lenders used their own funds to make Scheme loans, with government guaranteeing to reimburse lenders if borrowers do not repay. How lenders raise funds differs according to size and type of lender; the more cheaply they can raise funds the more profitable the loans might be. While many large lenders can take advantage of cheap funding offered by the Bank of England, smaller and alternative lenders cannot. Before the launch of the Scheme, the Department and the Bank recognised that the 2.5% interest rate borrowers were asked to pay on the loans would make it economically unviable for many smaller and alternative lenders to participate in the Scheme. The Department highlighted in its direction letter that this may increase the market position of the main UK banks in the SME lending market and thus impact competition levels.54