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Will an extension to the Funding for Lending Scheme boost business growth?

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It was announced today that the Funding for Lending Scheme (FLS), which was due to end in January 2014, will be extended for another year to 2015.

Government said the emphasis of the scheme will this time be turned to small businesses. This sounds like good news but since its launch in August, the FLS, which is supposed to encourage banks to lend by offering them cheap loans on the condition they pass them on to customers, has been criticised for failing to boost lending.

Among participating banks, lending was even lower than it was in the six months before the scheme was introduced. This contradicts Bank of England figures suggesting banks took nearly £14bn from the FLS between August and December last year.

Understandably, business leaders are sceptical that the scheme’s extension will have a tangible effect on business lending. When Real Business spoke to UK leaders about their thoughts on an extension of the FLS, they widely agreed that it is the economy and confidence that need a boost first – only then can lending improve.

“Funding for Lending was introduced last August but has had no effect on lending to SMEs. It’s a ‘Catch 22’ situation; the banks won’t lend until the situation improves and the situation will not improve until growing businesses can borrow money at sensible rates,” comments William Chase, the founder both Tyrrells Crisps and the Chase Distillery. Finance must be directed towards proven or potential exporters to create growth, he says. “The only way for the UK economy to grow is to sell more abroad and bring in new cash.”

It is suspected that the extension was made in the hope of appeasing the International Monetary Fund (IMF) who will be visiting in May. The IMF are expected to ask the Chancellor to reduce his austerity measures and increase government spending in order to create financial growth in the UK, which is said to receive stagnant growth figures on Thursday for the first three months of 2013.

The new incentives for banks will allow lenders to borrow an extra £5 from the Bank of England for each pound that they lend to small businesses through the FLS. u2028They will also be allowed to borrow £10 from next year’s extended scheme for every £1 they lend this year.

Brendan Flattery, CEO of Sage UK and Ireland, found too little confidence in his customer base to believe in the scheme. “Over the past 12 months customers are telling us that access to finance is improving, and from that perspective FLS is working. However, we’re also seeing fewer firms apply for credit and that’s because of the uncertainty about the wider economy.

“67 per cent of small businesses are forecasting growth this financial year, but 65 per cent suggested they lacked faith in the chancellor and his ability to support small businesses and grow the economy. By making it easier for businesses to get money the government has helped clear a path to growth for UK SMBs. But before they can expect anyone to take steps on that path they need confidence that they are heading the right way, and that proof only comes from growth in the economy.”

According to the Treasury, the FLS has three main objectives: 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; to increase the incentive for banks to lend to SMEs both this year and next; and to include lending involving certain non-bank providers of credit.

John Garfield, director at EZBOB, an online lender providing financing for e-tailers on Amazon and eBay, has higher hopes for the scheme but urges government not to forget about alternative lenders. “The extension of the FLS gives banks £10 in cheap funding for every £1 they lend to SMEs in 2013.  That should translate to the banks actually earning on small loans, thereby providing them with an incentive to make funds available for the small business market.

“Let us hope that the apparent good intention behind this announcement is more than political rhetoric. Our few remaining high street banks have shown little appetite to modernise their approach to SMEs and given their very public capital restraints are risk averse and laboriously slow and centralised when it comes to decision making. There are a variety of new and innovative lenders within the SME space lending in minutes not weeks. Let’s hope that these players who can deliver are not excluded.”

What are your thoughts on the extension to the FLS?

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