Embattled small businesses are to be thrown a double lifeline amid the credit crunch and slowing global economy - one is a multi- billion-pound package of support expected to be unveiled by Chancellor Alistair Darling in his Pre-Budget Report today and the other is a freeze on business overdraft charges from Royal Bank of Scotland.
Whether the measures have any meaningful impact remains to be seen, although both mark a recognition by the government of the grave threat facing the UK's estimated 4.7 million small businesses.
It is anticipated that Darling's package will include a deferral of the planned rises in the corporation tax rate and a relaxation of the criteria for getting state-backed debt under the small firms loan guarantee scheme.
The Chancellor is also likely to announce more details of a plan that would permit more SMEs to access loans from the European Investment Bank, as well as an investigation into the scale of the problems facing the beleaguered sector.
Small businesses have been hit hard by the economic downturn, the decline in demand, and the near-impossibility of getting affordable loans and, in some cases, any loans at all. The sector accounts for more than half of the UK's gross domestic product and employs more than 13 million people. The credit vice, which has tightened throughout 2008, is now threatening millions of livelihoods as the country tumbles into its first recession for 17 years.
While SMEs face the same difficulties of higher borrowing costs and declining consumer spending that afflict their larger rivals, which typically have more options to raise money, many observers of the sector say smaller businesses are more vulnerable in a downturn because they depended more on financing. More than their bigger counterparts, SMEs struggle as customers increasingly fall behind with payments and payments can be a matter of life and death for smaller businesses, particularly as banks become more reluctant and stringent with loans.
SMEs are also feeling the pinch more keenly as banks in- troduce charges for processing overdraft applications, increase fees for managing accounts or request additional security for loans. Such changes are the result of higher interbank lending rates, deteriorating economic prospects and a far more cautious attitude toward risk - but do nothing to free up credit for the embattled small operators.
Officials have played down suggestions that Darling will reveal plans to force banks to lend to small businesses. The government has already attempted to ease credit conditions by making its banking bailouts dependent on the banks' returning to "2007 levels" of lending to small businesses. Nonetheless, whether government-forced or not, Royal Bank's much-needed shot in the arm for SMEs with a commitment not to increase overdraft pricing, with effect from December 1, will doubtless be welcome, Royal Bank, the beleaguered Edinburgh-based lender which also owns NatWest and has been rescued by the government in the wake of a flopped £15bn rights issue, is the first bank to promise not to withdraw its lending facilities in an effort to help its 1.1 million business customers survive the downturn. The bank did not reveal how many business customers it had north of the border, but claimed it had the largest market share.
A spokeswoman for the British Banking Association said the move was an attempt to shore up struggling clients.
She said: "Increasingly our members are trying to find ways to help their small business customers in particular and to see what they can do in the current climate.
"Against a general trend of other costs going up it does help small businesses in terms of cash flow to know that some of their charges are fixed.
"Frankly, the banks want to hang on to customers and they clearly see this as a commercial advantage."
Overdraft lending to small businesses rose by 4% in the last year, and loans by 10%, according to BBA figures released last Friday.
Peter Ibbetson, chairman of small business at Royal Bank, said: "The bank fully recog-nises that one of the biggest worries facing small busi- nesses is the increase in the cost of borrowing and we believe this move will reassure our customers that the bank is committed to supporting them."
Around a quarter of the UK's small businesses bank with NatWest and Royal Bank.
Meanwhile, Stephen Alambritis from the Federation of Small Businesses said: "This is a very welcome initiative from NatWest and RBS. Small businesses are concerned about the availability and pricing of their overdrafts and we are pleased that the bank has listened to its customers and taken this action to support them."
At the same time, it is also anticipated that Darling today will exempt foreign dividends from tax in an effort to allay the tax concerns that have led several big companies to shift their tax domicile to Ireland.
A Treasury spokesman declined to comment.
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