Moves to trim £1m daily tax bill for crisis payments branded as another nail in the coffin for family safety net

Crisis loans for the poor, small cash awards that tide over people in dire need, are to be cut, in a move criticised by charities, with one describing it as “cutting holes in the final layer of the safety net for families”.

Averaging £100, the loans are meant to help the poorest people on benefits through difficult times. From April, the Department for Work and Pensions will limit the number of crisis loans in a year to three and no longer provide cash for items such as cookers and beds. It will cut the amount of money available to claimants from 75% to 60% of the total benefits they can be paid.

Ministers say the system has become unaffordable and claim the loans are not being used by people to lift themselves out of trouble. Instead, people keep coming back for more cash. In the past year, 2.7m crisis loans were given, with more than 17,000 people receiving 10 or more such loans. The daily bill to the taxpayer for emergency credit is £1m.

Borrowers are expected to repay the loan only after their crisis is over, with the money being deducted from their weekly benefits at either 12%, 10% or 5% interest over two years.

Steve Webb, the minister for pensions, said: “It is clear that the system is acting as a sticking plaster that isn’t addressing the real problems that people are facing. We need to ensure that crisis loan support is correctly targeted at those who need it most. That’s why we’ve taken urgent action to protect the budget.”

Charities said the government was attempting to cast the loans as “sticking plaster” rather than “a vital part of the welfare state” in an attempt to cut costs. The result, say campaigners, will be misery for poor families.

Alison Garnham, chief executive of the Child Poverty Action Group, said she was shocked that ministers would “cut holes in the final layer of the safety net for families hit by a crisis”.

She said: “Most worrying of all is the lack of any mention in the minister’s statement of how the wellbeing of children will be protected when families are left in utter destitution by the removal of their right to a crisis loan.”

Garnham said people often needed the loans because of delays in benefit payments. “Ministers have to accept more responsibility for the rise in crisis loan applications. It is under their instructions that people are told to apply for a crisis loan when delays happen to benefit claims,” she said.

Many charities had feared cuts to cash loans would be made after ministerial sources briefed the tabloid press that the system was being abused by people using the money to pay for nights out. There were also claims that the money was never repaid.

Helen Dent, chief executive of Family Action, said: “Cracking down on crisis loans is another nail in the coffin of the welfare safety net for families in crisis. We know from our welfare grants scheme that cookers and beds are vital for women fleeing domestic violence or patients waiting in a hospital bed so that they can move to safe independent living.”

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The government’s My Home Finance scheme aims to offer borrowers with a poor credit history a cheaper alternative to loan sharks

Borrowers who are normally forced to seek exhorbitantly expensive credit from door step and pay day lenders will be offered a cheaper source of borrowing by the government and the National Housing Federation from today.

Work and pensions secretary Iain Duncan Smith is launching a new loan scheme for people who are financially excluded by the high street banks because they have a poor credit record or are on a low income.

The scheme My Home Finance, run in collaboration with the Royal Bank of Scotland, 26 housing associations and the Wates Foundation, will provide loans charging a typical APR of 29.9%, comparing very favourably to the rates charged by doorstep and pay-day lenders, which can range from 200% to 2,000%. Loans of around £500 will usually last for a year, but borrowers can select a shorter or longer term if preferred.

My Home Finance will start with 10 branches across the West Midlands by the end of October, and will roll out to the rest of the UK from next April if successful, writing up to 150,000 loans to people on lower incomes over the next 10 years. The branches will be located in busy high streets and shopping centres, providing easy access to those who have previously been turned away by high street lenders.

The West Midlands has unemployment levels among the highest in the UK and the National Housing Federation says the area is in particular need of affordable credit, access to bank accounts and money advice. Branches have already opened in Hereford, Worcester, Walsall and Northfield, south Birmingham. By the end of October, further branches will have opened in Coventry, Tamworth, Dudley and Wolverhampton, and in Birmingham city centre and Erdington, in north Birmingham.

Around 2.5 million people borrow from doorstep lenders at rates often in the region of 272% for new customers. A further 200,000 are estimated to borrow from loan sharks. A majority of those financially excluded are social housing tenants.

Dixon Erroll, a cleaner from Birmingham who has three or four part-time jobs and a history of missed loan payments, is borrowing £1,000 from My Home Finance to pay off two payday loans totalling £800 which cost him £200 a month to renew. He will be paying an interest rate of 16% APR over one year to repay the £1,000 loan.

He said: “I’ve dealt with doorstep lenders in the past, and payday lenders now, and they are robbers. My Home Finance are very fair to deal with, and the loan will be repaid after 52 weeks so you know exactly where you stand.”

Loan payments will be made by direct debit: My Home Finance will help those who don’t already have an account open one with the Royal Bank of Scotland.

Itisam Akhtar, office manager for the Birmingham branches, said that each case would be judged on its merits: “If they’ve got a recent entry on their credit record, we need to look at that with a bit of caution. We will have a chat with the customer – we know what questions to ask. But we can’t dismiss them out of hand – that would undermine the whole purposes of the scheme.”

David Orr, the federation’s chief executive, said: “My Home Finance will provide an affordable, convenient and trusted option for people on lower incomes looking to build up their savings and borrow modest sums.

“By offering fair loans at fair prices, we hope to offer an alternative to both loan sharks, who cynically prey on hard-up families, and doorstep lenders, who are all too willing to lend cash to the desperate at hugely inflated rates of interest.

“This ambitious not-for-profit sustainable scheme shows the determination of the housing association sector, the government and RBS, to help financially excluded consumers to join the financial mainstream by saving and borrowing in a fair and responsible manner.”

Malcolm Hurlston, chairman of the debt advisory charity Consumer Credit Counselling Service, welcomed the launch of My Home Service, but said that given the limited number of loans the service was intending to make, it would not replace doorstep lenders and payday loans.

He also questioned the wisdom of collecting payments by direct debit, pointing out that although this has enabled the service to keep interest rates low, lenders in the the high risk, “sub prime” market have previously said that regular face-to-face contact with borrowers was necessary to ensure payments were made. “Although paying by direct debit will keep the costs down, it could be a weakness as well,” he said.

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EFG is available until 31 March 2011.

EFG supports lending to viable businesses with an annual turnover of up to £25m seeking loans of £1,000 through to £1million and is available to businesses in most business sectors.

However, EFG is subject to certain sector restrictions arising from the EU De Minimis State Aid rules, the Industrial Development Act 1982 (which provides the statutory basis for EFG) and also for national policy reasons

Types of EFG Facilities Available

Under EFG, the following facilities can be guaranteed, repayable over a period of between 3 months and 10 years until otherwise indicated:

• New term loans
• Refinancing the existing term loans, where the loan is at risk due to deteriorating value of security or where for cash flow reasons the borrower is struggling to meet existing loan repayments
• Conversion of an existing overdraft into a term loan to meet working capital requirements

• A guarantee on invoice finance facilities to support an agreed additional advance on an SME’s debtor book. This will supplement the invoice finance facility already in place. (Available for terms up to 3 years)
• A guarantee on new or increased overdraft borrowing for the SMEs experiencing short term cash-flow difficulties. (Available for terms up to 2 years)

An EFG lender may not necessarily offer the full range of lending provided for under the EFG rules if to do so would be incompatible with their normal commercial lending practices.

Application Process

Businesses may choose to approach one or more of the 44 participating lenders  to discuss their borrowing needs.

The lender will typically assess the business against their normal commercial lending criteria for instance with regard to the viability of the business, ability to service the loan repayments, and availability of existing security, in order to determine which form of lending, if any, is most appropriate.

Where a lender determines that use of EFG is appropriate, each lender (usually via the lender’s central EFG processing team), is provided with access to the EFG web portal through which they administer the EFG eligibility criteria, and through which they can check EFG eligibility at any point in the loan application process.  An overview of the EFG application process is available here. 

However, there is no automatic entitlement to receive a guaranteed loan and nor is there any pre-qualification process for it. Decision-making on individual loans is fully delegated to participating lenders and are made on commercial terms.  BIS plays no role in the application or decision making process.

The Government Guarantee

By providing lenders with a Government backed guarantee for 75% of the loan value, we are facilitating lending that would otherwise not be available. EFG is intended to support loans to businesses that can ultimately repay the loan in full, and not intended to provide protection to the borrower in case of default.

In return for the guarantee, the Government charges the borrower a premium equivalent to two per cent per annum on the outstanding balance of the loan, and is assessed and collected quarterly throughout the life of the loan. However, any fees, interest rates, other charges made by a lender are a matter for the lender concerned.

Personal Guarantees / Security

EFG allows lenders to take an unsupported personal guarantee on an EFG backed loan for up to the full value of a loan. In guaranteeing the loan, the taxpayer is taking a risk, so it is right the risk is shared by the lender and the borrower, as it would be for any commercial loan.

Lenders are not permitted to take a direct charge over a principal private residence for a new EFG backed loan. However, the EFG rules only apply to that portion of any loan or facility guaranteed under EFG. It does not apply to any non-EFG lending.

Enterprise Finance Guarantee: Further help

The delivery of EFG , including the decision on whether or not it is appropriate to use it in connection with any specific lending transaction, is fully delegated to the participating lenders. Capital for Enterprise Limited manages the operation of EFG on behalf of the Department.

Business Link can provide information and advice to businesses seeking finance including under EFG. For an initial appraisal on whether your business may be eligible for the Enterprise Finance Guarantee go to the Business Link website.

For Lenders – Individuals within a participating lender should contact their central processing team or other designated internal EFG expert who can obtain further information from CfEL.

For Businesses – All decisions relating to the use or otherwise of EFG in individual cases is fully delegated to the participating lenders. Businesses are advised to approach a number of the participating lenders to discuss their borrowing needs.  Businesses that receive an EFG backed loan should discuss any resulting EFG issues with their lender, including issues relating to premium collection or refunds.

Please note that neither BIS nor Capital for Enterprise Ltd (CfEL) can advise on individual eligibility queries. Nor will BIS or CfEL intervene in the commercial relationship between Borrower and Lender in the event of disputes. Customers dissatisfied with the experience of dealing with their bank should raise their concerns initially through the bank’s own customer complaints procedure.

If the matter is not resolved businesses with a turnover of under £1 million have the option of taking their complaint to the Financial Ombudsman Service or on 0845 080 1800. Larger businesses might wish to seek legal advice if there is a contractual dispute. Alternatively customers always the option of seeking support from other lenders.

Enterprise Finance Guarantee: List of Lenders

Airdrie Savings Bank
Allied Irish Bank
Bank of Baroda
Bank of Cyprus UK
Bank of Ireland (NI only)
Bank of Scotland
Barclays
Big Issue Invest
Bolton Business Ventures
Braveheart Investment Group
Business Enterprise Fund
Business Finance Solutions
Capitalise Business Support
Centric Commercial Finance
Close Brothers
Clydesdale Bank
The Co-operative Bank
Cumbria Asset Reinvestment Trust
Davenham Group
DSL Business Finance
Donbac
East London Small Business Centre
First Trust Bank (NI only)
Foundation East
GE Capital
GLE oneLondon
HSBC
IGF Invoice Finance
Lloyds TSB
NatWest
NEL Fund Managers
Northern Bank (NI only)
The Royal Bank of Scotland
Santander Corporate Banking
Skipton Business Finance
SME Invoice Finance
South West Investment Group
State Securities
Triodos Bank
UK Steel Enterprise
Ulster Bank (NI only)
Venture Finance
Whiteaway Laidlaw Bank
Yorkshire Bank