Tonic for small firms in lending scheme expansion

The extension of the Funding for Lending scheme (FLS) will offer banks major incentives to provide loans to such firms, which continue to be starved of credit, while it will also cushion UK lending conditions from any unforeseen headwinds in the global economy.

The success of small and medium-sized enterprises (SMEs) is seen as key to pulling Britain out of the economic doldrums, but loans to such companies have been falling by 3 per cent a year and Sir Mervyn King, the Bank of England governor, acknowledged that FLS – launched last year – had not helped the sector as much as it had larger firms and households.

Under the original scheme, banks can access low-interest funding in return for lending to households and businesses. Now, they are being told that the amount of funding available will be increased up to 10-fold when based on lending to SMEs – businesses with turnover under £25m.

In addition, FLS will be expanded to include bank loans to finance houses and leasing corporations that provide billions in working capital a year to small businesses.

The fact that some of these specialist lenders may include those who support buy-to-let and high loan-to-value ratio mortgages has raised concerns about fuelling a new housing bubble.

However the announcement, which also sees FLS extended until January 2015, was broadly welcomed.

Sir Mervyn said: “The aim is to increase the incentives for banks to lend to SMEs, as they have experienced a less marked easing in credit conditions since the original scheme was launched.”

Chancellor George Osborne said: “This is a big boost for the [SMEs] that are at the heart of the British economy.”

Business Secretary Vince Cable said more lending to them was “essential to building a stronger economy” and that the lack of such funding was a problem that was “not yet fixed”.

Bank figures last week showed net lending to companies slumped by £4.8bn in the three months to February, declining by £2.8bn in February alone.

Yesterday’s announcement aims primarily to help SMEs borrow money for working capital needed to grow and drive the economy forward, amid alarm at their continuing difficulty in accessing funds and concern that many were hoarding cash rather than investing.

Under the new deal, every pound of additional lending to SMEs next year will allow banks access to £5 of discounted funding from the Bank. The ratio in the rest of the scheme is 1:1.

In a bid to speed up the flow of much-needed credit into the system, each pound lent to SMEs for the rest of this year will allow draw-down of twice that in 2014.

Officials believe that the incentives for such lending will not detract from home loans, but rather encourage an overall growth in the amount banks lend in the UK.

They are thought to be relaxed about the possibility that there is little take-up of the scheme because of favourable borrowing conditions in the wider marketplace, since the scheme’s aim is broadly to loosen credit.

However, they believe that it will assure banks that they will still have access to low-interest funds even if the global economy takes a turn for the worse, making it more difficult to find finance elsewhere.

Shadow Treasury minister Chris Leslie said: “Labour called for reforms last year, so these belated changes are welcome. But with net lending to businesses down by £4.8bn in the last three months alone they do not go far enough.”