Public intervention in UK small firm credit markets: Value-for-money or waste of scarce resources?

Loan guarantee schemes are used in many countries to provide financial support to small firms by guaranteeing loans from commercial banks, but questions remain about whether public intervention in private credit markets to support entrepreneurial firms is justified. This paper examines whether the UK Small Firms Loan Guarantee Scheme (SFLG) provides value-for-money to the UK tax payer, presenting a regression based performance approach which then feeds into a formal cost–benefit analysis. Specifically, we consider whether firm performance post-investment is such that it justifies the governments’ presence in the lending market and the costs associated with it. Our findings suggest that entrepreneurial firms that are able to access new finance through SFLG achieve superior performance in the form of improved sales, job creation and exports and that this justifies public intervention in private credit markets.

► Loan guarantees are a common form of policy to support small businesses. ► This paper examines the impact of the UK Small Firm Loan Guarantee scheme. ► Firms accessing the SFLG achieve superior performance to non-SFLG firms. ► A cost–benefit analysis suggests SFLG justifies its cost.