Last updated: November 28, 2013 3:10 pm

Business leaders welcome move to improve lending to SMEs

Business leaders said the government’s move to focus bank subsidies on credit to companies would help spur lending, which remained hard to obtain at reasonable rates for smaller companies.

Lee Hopley, chief economist at the EEF manufacturers’ organisation, said: “After putting the Funding for Lending Scheme ‘on steroids’ in March, the chancellor has now doubled the dose. Putting further firepower behind the banks through FLS to make more finance available and at a lower cost should provide a further spur to lending, which is still challenging for many SMEs despite recent improvements.”

She added: “With the recovery in business investment still weak, getting credit flowing to business is critical to turning this round.”

John Allan, national chairman of the Federation of Small Businesses, said it was “a surprising yet refreshing announcement, which will make a difference to lending to thousands of our members and millions of small firms. It is something the FSB has raised with the governor of the Bank of England and he is clearly listening”.

Mr Allan said it was encouraging that Mark Carney, Bank of England governor, had recognised the contribution small groups make to job creation and that the real economy had been given priority over the housing market, which is receiving assistance in other areas such as Help to Buy.

“FLS has already helped reduce the cost of finance for businesses. What we now need is to see a focus on increasing the number of firms getting access to the finance they need to grow,” he added.

John Longworth, director-general of the British Chambers of Commerce, said the move showed that the government and the BoE recognised the difficulties faced by businesses in accessing finance.

“The real test for Funding for Lending has always been whether it is able to get credit flowing to young and fast-growing firms and unfortunately any improvement in credit availability is only being felt by ‘safe bets’, while young, fast-growing firms continue to struggle to find the finance they need to expand,” he said.

Mr Longworth added: “Policy makers need to go further to help new and growing companies by delivering a British Business Bank with far more scale than under the government’s current proposals.”

The Treasury and the BoE increased the incentives to lend to SMEs under the scheme earlier this year, by increasing the amount of cheap finance banks could access. The fee banks pay will now be cut to the lowest point on the FLS scale.

Lending volumes to small and medium-sized enterprises have fallen by nearly a quarter to £170bn since their 2009 peak, according to a report for Royal Bank of Scotland by Sir Andrew Large, former BoE deputy governor.

The Bank’s latest data showed that net lending to businesses fell by £2.3bn in the three months to August and contracted across all sizes of company.

According to an EEF survey, more manufacturing companies are seeking finance to invest, but at a price. Businesses, especially smaller ones, reported that the cost of finance was going up.

Michael Saunders, an economist at Citi, said: “We suspect the government will do more to encourage SME lending in the Autumn Statement.”

Lending volumes to small and medium-sized enterprises have fallen by nearly a quarter to £170bn since their 2009 peak

Sir Andrew’s report drew attention to structural problems in the business lending market.

Andrew Bailey, head of the Prudential Regulatory Authority, said there had been a substantial change in the mechanics and capacity of mortgage lending, but the capacity and mechanics of lending to small and medium-sized businesses may have fallen behind.

Andy Haldane, the BoE’s executive director for financial stability, said the Financial Policy Committee, the new stability regulator, would examine Sir Andrew’s suggestion of a credit registry to pool information on SMEs.

“It’s a difficult market to get into because all of the credit history and information on the SMEs is stored in the incumbent, it’s not generally available,” Mr Haldane said.

A registry could be used to “bundle SME loans, and package them for onward sale, in other words to create securitisation market for SMEs. Which I think would be really positive as a second channel for SME bank financing,” he said.

Additional reporting by Claire Jones

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