Is ‘getting banks lending’ working for SMEs?

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In July 2012, with Government support, the Bank of England launched Funding for Lending, a scheme which allows banks and building societies to borrow from the Bank of England at cheaper than market rates for up to four years, designed to help them to increase lending to businesses by lowering interest rates and increasing access to credit.

The scheme also created incentives for banks to increase their lending to UK households. Businesses and banks are encouraged to pass on the benefit in different ways, where some might offer specific business loans and mortgages linked to the scheme, such as fee-free, or higher loan-to-value products, and others might reduce interest rates or change the terms and conditions on existing products.

Summer 2013 rumblings in the media from the small business sector suggested that banks generally seemed keener to work with the incentives within the government's support strategy for house buyers, in preference to lending to SMEs. Many in the Small and Medium sized Enterprises (SME) community seeking support from their banks reported continuing difficulties and a continuing unwillingness of the banks to help them.

Whether or not the Government initiative to create a new business bank will help to increase the amount of lending to businesses and provide more diverse sources of finance is yet to be seen, and the bank will not be fully operational before Autumn 2014.

The information from this business banking initiative recognises that SMEs often need loans or other forms of finance to grow their business, yet many find it difficult to access finance. It was anticipated by the Government that the business bank would bring together and build upon existing government schemes aimed at supporting access to finance for businesses under a single organisation, including a single entry point for the various government advice and support schemes.

The business bank has £1 billion of additional government funding which is managed alongside £2.9 billion of existing government commitments. A £300 million investment programme was launched earlier this year to encourage new entrants and the growth of smaller lenders in the market. The business bank will work through the wholesale market and will not lend directly to, or invest in, businesses. It will work with the private sector to increase levels of finance. Its success will be measured by its impact on attracting new finance for businesses and stimulating competition.

The measure of the business bank success will be in its impact, where SMEs are reporting more success in gaining the overdue financial support they need to survive, grow and diversify. By August 2014 we should have a better idea of what the business bank has achieved, let's hope for direct feedback from a happier SME sector!