AN ASSESSMENT OF THE LOAN GUARANTEE SCHEME Available to Purchase

The Loan Guarantee Scheme (LGS) has, for the last thirteen years, been the foremost government initiative concerned with the financing of small businesses. It was developed to alleviate some of the fundamental problems that smaller firms face when seeking finance due to a lack of loan security, and the fact that some 33,500 firms have obtained funding under the scheme is an indicator of its success. The study uses econometric techniques to identify the influential determinants of LGS take‐up and failure rates. The results show that the two scheme parameters, the interest rate premium and the proportion of the loan guaranteed, were the key determinants of take‐up. On the other hand, failure rates were influenced by liquidity (cash flow), interest rates and other macroeconomic factors. We conclude that the government can directly influence the level of take‐up on the LGS by adjusting the two key parameters, namely the premium and the guarantee.