The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK

Cowling M | Working Paper WP7 | Institute for Employment Studies | Jan 2007

It is a widely held perception, although empirically contentious, that credit rationing is an important phenomenon in the UK small business sector. In response to this perception the UK government initiated a loan guarantee scheme (SFLGS) in 1981.

In this paper we use a unique dataset comprised of small firms facing a very real, and binding, credit constraint, to question whether a corrective scheme such as the SFLGS has, in practice, alleviated such constraints by promoting access to debt finance for small credit constrained firms.

The results broadly support the view that the SFLGS has fulfilled its primary objective.