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ACCA Applied Skills · Financial Management · Finance for small- and medium-sized entities (SMEs)

A small manufacturing company has a good business plan but lacks the assets to offer as security for a bank loan. Which of the following is the most likely reason why a government-backed loan guarantee scheme would help it?

A government loan guarantee covers part of the lender's potential loss if the SME defaults. This lowers the bank's risk, so it is more willing to lend to a business without sufficient security. The borrower still pays interest and the finance stays as debt.

  1. AIt lets the company issue shares to the public on a main stock market without meeting listing rules
  2. BIt reduces the lender's risk of loss, making the bank more willing to lend despite the lack of securityCorrect
  3. CIt removes the need for the company to pay interest on the loan
  4. DIt converts the loan into equity held by the government

Explanation

Loan guarantee schemes address the SME funding gap caused by insufficient collateral. The government guarantees a proportion of the loan, so the lender's potential loss falls and it is more willing to lend. The borrower still pays interest and the loan remains debt, so the other options are wrong.

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