Following criticism that the Funding for Lending scheme has done little to extend credit for small firms, the Bank of England has announced an extension to the current scheme, with further incentives for lenders.
The Treasury and the BoE have announced that three specific changes will be made to the FLS scheme, which was first introduced in August 2012. The changes aim to encourage lenders to provide funding to small firms by giving them access to cheaper loan rates from the BoE compared to those available on the commercial money markets.
Despite the worthy aims of the FLS scheme when it was first launched, only last week the Bank announced that business lending had actually fallen by £4.8bn during the three months to February 2013.
Changes to the FLS scheme
Firstly, the existing scheme will be extended by a further twelve months, to the end of January 2015.
Secondly, the incentives to boost net lending will be heavily skewed towards SMEs. Specifically, for every £1 lenders make to SMEs during 2014, they will be able to draw £5 from the FLS during the extension period, ending in January 2015. To further encourage lending to cash-strapped smaller firms, for every £1 of lending during the remainder of 2013, lenders will be able to take advantage of £10 in borrowing from the FLS in 2014.
Thirdly, financial leasing and factoring lending will now be counted within the scope of the FLS, as the Government appears to have recognised the importance of lending from sources other than traditional overdrafts and loans.
Commenting on this third point, Philip White, CEO of Syscap said that “the flaw in the Funding for Lending scheme was that there was no specific incentive for banks to use the scheme to increase lending to SMEs rather than to big companies.”
“The scheme also overlooked that really vitally important flow of funds from banks through independent leasing companies and on to SMEs. Leasing companies have a lot of the infrastructure and specialist skills to help fund small companies that some banks have lost over the years.”
Commenting on the extension of the FLS, George Osborne said that the changes represented “a big boost for the small and medium sized businesses that are at the heart of the British economy.”
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