Member Article

Funding for Lending scheme expanded

The Government and Bank of England have announced an extension to the Funding for Lending Scheme by a year, with promise of more incentives for banks to lend to SMEs.

The scheme was expected to end in January 2014, but will now run until January 2015 and the Treasury say incentives to boost net lending will be “heavily skewed” towards SMEs.

For every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme in the extension period.

The scheme will also be expanded to incorporate banking groups involved in financial leasing corporations and factoring corporations, and certain mortgage and housing credit corporations.

The Governor of the Bank of England said “The FLS has contributed to a sharp fall in bank funding costs and an improvement in credit conditions since the middle of last year. The changes announced today build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015.

“I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase. Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised.”

Matthew Fell, CBI director for Competitive Markets, said: “Funding for Lending is already making a difference in the housing market and there are signs that it is starting to lower the cost of finance for businesses.

“The additional incentives for banks should accelerate activity in the small business financing market.

“But we need to be realistic - Funding for Lending is only one piece of the finance jigsaw. Boosting firms’ confidence by raising awareness of the various funding schemes available is critical.”

Emmanouil Schizas, senior economic analyst at the Association of Chartered Certified Accountants, said: “The Bank of England has clearly taken business groups’ criticism to heart about the Funding for Lending Scheme. The additional incentives provided under the scheme would heavily skew incentives in favour of lending to small business and we would expect them to have a strong effect on both supply and demand for SME loans. The wider scope of the scheme (covering asset based finance) addresses an important limitation of the original programme and will help efforts to diversify SMEs’ financing.

“This is an extremely welcome adjustment by the Bank of England, although we will expect a greater level of accountability and disclosure for participating banks. Moreover, it’s crucial that the Bank of England set itself a target past which the programme will be judged to have outlived its purpose. What we need to see after all, is a remedy for specific market failures, not a permanent crutch for British SMEs.”

Head of Policy at the Forum of Private Business, Alex Jackman, said: “Many will see this as the last throw of the dice for FLS to maintain confidence in the SME lending market so government really needs to make sure it is working for both businesses and banks, otherwise it will be small firms that yet again suffer. You can’t keep fine tuning something and continue to get it wrong.”

On the extension of the scheme to leasing corporations and factoring corporations, Alex added: “While asset finance will be of help to some micro-businesses, smaller firm with fewer assets are less likely to benefit, while many organisations who deal in this kind of loan product demand turnovers in excess of a million. Appeal could be limited for the smallest employers.”

Ben Dowd, O2 Business Director, commented: “The extension of the Funding for Lending Scheme is another welcome initiative from Government to encourage small business growth. But it’s not just about funding. Small businesses form the engine room of the economy and big businesses have an important role to play in helping Britain’s entrepreneurs turn their ideas to reality by offering advice, mentoring and support. Only by working together will we get Britain’s economy back on the road to growth.”

This was posted in Bdaily's Members' News section by Tom Keighley .