The lending carrot

Funding for Lending Scheme extended by a year with added incentives for banks to lend to SMEs

The lending carrot

It is somewhat refreshing when the government realises one of its flagship schemes isn’t quite delivering what it intended for SMEs.

The Funding for Lending Scheme (FLS), launched in August last year by the Treasury and Bank of England, aims to stimulate the economy by offering banks funding at low-interest rates, so long as it is passed onto households and businesses.

Suffice to say, our start-ups haven’t really been feeling the benefits of the scheme thus far and, as a result, the scheme is now being extended with greater incentives for SME-lending.

The three major changes being made to the FLS are as follows:

  • The scheme is being extended for one year, meaning funds can be drawn until the end of January 2015.

  • Incentives to boost lending are to be “skewed heavily towards SMEs”. So for every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme in the extension period.  And to encourage banks to lend to SMEs sooner rather than later, every £1 of net lending to SMEs during the remainder of 2013 will be worth £10 of initial borrowing allowance in 2014.

  • Programme will also be expanded to count lending by banking groups involving financial leasing corporations and factoring corporations, which can be important sources of finance to some SMEs, and certain mortgage and housing credit corporations.

The government believes these changes provide banks and building societies with the assurance that they will be able to continue to fund lending to the real economy at reasonable cost, even if funding pressures rise again. 

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” says chancellor George Osborne. “The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small- and medium-sized businesses so that they can play their full part in creating new jobs.”

Governor of the Bank of England Mervyn King added: “I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase.”

We’re a cynical bunch at EB and, as such, it hasn’t gone amiss to us how little interest the banks appear to have had to lending to our SMEs over the last few years.  So whilst we welcome any moves to open up the availability of credit to start-ups, we wait with bated breath to see how an incentives system like this will play out in practice. The carrot may well have to be a bit bigger… 

Adam Pescod
Adam Pescod

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