Extension to lending scheme aimed at small firms
The Bank of England and the Treasury have extended the Funding for Lending Scheme (FLS) with the intention that banks will be incentivised to lend to small and medium sized businesses.
Since its introduction in August last year, the FLS has contributed to a sharp reduction in funding costs for banks and building societies. Although it has led to a reduction in borrowing costs and an increase in credit availability for UK businesses and households, the improvement in credit conditions has been less marked for SMEs than for larger businesses and households.
Small firms
This extension to the FLS has three main objectives: to increase the incentive for banks to lend to SMEs both this year and next; to give banks and building societies confidence that funding for lending to the UK real economy will be available on reasonable terms until January 2015; and to include lending involving certain non-bank providers of credit, which play an important role in providing finance to the real economy.
This has resulted in three specific areas. First, the scheme will be extended for one year, meaning that drawings will be permitted until the end of January 2015.
Second, as part of the extension, the incentives to boost net lending will be heavily skewed towards SMEs. New allowances for drawings in the extension period will be calculated on the basis of banks' lending behaviour. For every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme in the extension period.
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. Net lending to other sectors during the remainder of 2013 will count towards the initial borrowing allowance for 2014 pound for pound.
Third, the FLS will 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. All participating banks and building societies will be required to report net lending related to these non-bank credit providers for the purpose of calculating their borrowing allowances during the extension period. In addition, banks and building societies will have the option of reporting this lending for the purpose of calculating their borrowing allowance for the remainder of 2013.
Chancellor George Osborne specifically addressed the issue of small firms. He said: "This is a big boost for the small and medium sized businesses that are at the heart of the British economy. 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."
Fine tuning
One small business group expressed its hope that this move actually brings assistance for the smallest of firms and start-ups.
The Forum of Private Business has described the fine tuning as an essential change. Alex Jackman, the Forum's Head of Policy, said: "While Funding for Lending may have worked to boost mortgage markets, to date it's not worked as well for small businesses. Anecdotal evidence suggests smaller firms and start-ups are the ones really struggling to source affordable credit so a heavier incentive to finance those businesses is welcome. And with the BoE only recently saying UK banks are still short on capital, it's not unlikely lenders will continue to shrink business lending as they seek to shore up finances.
"Ultimately, we need to see the FLS getting more cash to those businesses who need it most. But these schemes must be simple to use for finance providers and their availability to small businesses must be well communicated for it to be a success."