2013-03-12 – London
The UK government has admitted major shortcomings in its flagship Funding for Lending Scheme (FLS). Small and medium sized enterprises (SME’s) continue to struggle for loans despite the sector being one of the main focuses of the scheme in the first place.
The FLS was introduced by the Treasury and the Bank of England in July 2012 to boost lending to the so-called real economy. UK businesses would benefit from the increased availability of loans, whilst banks and building societies would be incentivised to lend more by being allowed to borrow more, and at a lower cost. It was designed to encourage broad participation amongst all of the UK’s institutions so the real economy would see big changes in the stagnant business loan and residential mortgage markets.
In an attempt to improve access to bank credit for SME’s, the government is now aiming to bolster the scheme further. The revision of the FLS could see it extended beyond this year, whilst funding is better directed towards business lending rather than mortgages, which could assist SME’s in hiring more staff. Nick Clegg has called for the lending scheme to effectively be put “on steroids”. Vince Cable, has consistently put pressure on banks to lend more to small businesses, and the latest announcement forms part of measures to improve the scheme.
Gregory Church, head of resourcing at Modelling Design Partners, agrees. “The lack of SME funding affects the ability of successful small- and medium sized companies, like MDP, to recruit and expand faster”.
Larger companies with access to capital markets can borrow at rates below 5%, while successful medium sized companies are required to borrow at rates above 15%. This effectively further hampers economic growth, while inefficient, very large companies continue to retain staff in roles that have become redundant, while small and medium sized companies in growing sectors are effectively prevented from growing faster.
The government is determined not to underestimate the importance of the SME sector in improving the economic landscape. Mid-sized companies are seen as an important part of the UK economy, and will be central to creating more private sector jobs, and further reduce the stubbornly high levels of unemployment. Chancellor George Osborne is set to give the issue particular emphasis in the Budget next week.
A form of risk guarantee on mortgage lending has also been mentioned, although it is not clear what the reasoning behind this is. It is suggested that such a guarantee would boost the mortgage market for first time buyers, although this may increase risky mortgage lending of the exact type which was a major part of the cause of the current financial crises.
At the moment, however, exact measures on how the government plans to improve the FLS are not apparent. Questions regarding the exact term of the scheme, its size and its effectiveness have been left unanswered.
