Royal Bank of Scotland (RBS) has signed a deal to lend £1bn more to small businesses under the government's recently launched Working Capital Scheme.

Under the scheme, the government will provide banks with guarantees covering 50% of the risk on bank lending for the day-to-day capital requirements of companies with turnover of up to £500m.

The agreement with RBS and NatWest represents the first deal for the Working Capital Scheme, with the government criticised by business lobby groups for sluggish progress on the initiative which was announced in January.

“RBS and NatWest have agreed that the capital released by their participation in the Scheme will be redeployed in support of lending to credit-worthy SMEs and mid-corporates,” said business minister Ian Pearson.  

It represents an important step towards achieving the government’s aim of getting increased credit flowing to UK businesses during these difficult times, the minister added. 

A spokesman for RBS confirmed that the first tranche of investment would be about £1bn and is part of a broader £16bn commitment to additional lending to businesses that RBS announced at the end of February.

The banking group noted that it has agreed over £77m in loans through the government's Enterprise Finance Guarantee (EFG) scheme.

Pearson said in a statement that talks with two other unnamed banks to participate in the scheme were at an advanced stage.

A spokesman for Pearson's department said the government hoped to reach further agreements shortly.

The working capital scheme was set up in January to help small and medium-sized businesses refinance debt under a plan to stop cash-starved firms going bust.

© Crimson Business Ltd. 2009