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Can the government cure the lending drought?

4 Mins

SME financing is a hot topic these days, as politicians attempt to devise solutions to the UK’s funding woes. But given economic turbulence, how relevant or powerful are government-based initiatives? And at what point should we recognise the potential of alternative financial providers to support these economy-boosting campaigns?

Recent months have seen the introduction of an array of SME financing initiatives, most of which have failed to encourage lending as originally hoped.

The government attempted to boost small business financing via the now defunct Project Merlin. The principle behind it was that taxpayer cash injected into major banks would then be passed on as extra capital to businesses. Unfortunately, Project Merlin missed its target by an astonishing £1bn.

The National Loan Guarantee scheme (NLGS) is also now officially winding down after just six months of operation, following the launch of the Funding for Lending scheme (FLS). Government officials say this is because the FLS is a more “bank-friendly” solution, since banks and building societies can borrow at cheaper rates than through the NLGS. 

Whilst the past month has seen the number of UK lenders participating in the FLS more than double, the value of outstanding loans which are eligible for low-cost funding has barely increased – the total value of loans covered by the scheme has risen from £1.2tn to just £1.3tn.

The primary issue with government lending schemes is the continued dependence on the weak banking distribution channel, which has notably failed.

The latest announcement from the coalition connected to small business lending has been manufactured by Vince Cable, in the appointment of a government-based business bank. The bank aims to provide small and medium-sized businesses with an alternative source of finance. 

In theory, this is a strong idea from the business secretary; but it is expected to take 18 months to bring the bank into operation, leaving a gaping hole in lending initiatives until then. Also, considering the UK’s long-term and committed relationship with red tape, it is doubtful that a fully regulated financial services institution can be created in as little time as 18 months.

While this represents a move in the right direction from government, the coalition now needs to go one step further in recognising alternative players which are equipped to help the small business and the economy long-term. 

Last week, John Griffiths-Jones, former KPMG boss, said that the current growth of challenger banks isn’t the solution to the shortage of lending to small firms. This, in my opinion, is dismissing an opportunity before it has even had a chance to truly show its capabilities. A notable strength of the business bank proposition is the opportunity it provides for new and innovative players to work with the government and traditional banks in order to open up fresh distribution channels and drive a quicker economic recovery.

British SMEs are the catalyst to our economic growth and more needs to be done to grow their intellectual property. While I applaud any government attempts to support and build British small business, continuing a series of lifeless and cyclical campaigns using traditional banks as the focal point can only lead to an unsuccessful result.

Nick Ogden is CEO and founder of CashFlows.

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