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Government scheme fails to boost SME lending

By Carina Perkins+ , 28-Aug-2014
Last updated on 28-Aug-2014 at 16:28 GMT2014-08-28T16:28:04Z

Bank lending to SMEs is falling despite government efforts to encourage better funding
Bank lending to SMEs is falling despite government efforts to encourage better funding

Business groups have called for government action after a new report showed lending to small and medium-sized firms (SME’s) such as restaurants, hotels and bars continued to fall in the second quarter of the year.

According to the Bank of England’s latest update on the government’s Funding for Lending (FLS) scheme, net lending to SMEs fell by £435m in the second quarter (April to June).

The fall was less dramatic than in the first quarter, when SME lending plummeted by £723m, and the Bank said some of the weakness in bank lending to smaller businesses could reflect ‘weaker demand’.

However, business advocates said it was ‘disappointing’ that SME lending has continued to fall despite the introduction of the FLS, which reduces bank funding costs in a bid to encourage lending to smaller businesses.

Phil Orford MBE, chief executive of the Forum of Private Business, said: “The Funding for Lending Scheme shows another net reduction of funds reaching small businesses.

“These figures would surely be worse still if Funding for Lending was not in place, and it is true there is a weakness in demand, but it remains disappointing to see less money being lent in this crucial part of the economy.”

Orford called for more political focus on the issue, arguing that ‘better and wider’ bank lending to the small business sector should be a crucial component of any prospective government’s manifesto.

Call for better lending

John Langworth, director general of the British Chambers of Commerce also called for government action to ensure better provision of funds to SMEs.

“Despite the welcome re-focus towards SME lending, the real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses,” he said.

“Unfortunately many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential.”

Alternative funding

According to recent research from Boost Capital , the lack of bank funding for SMEs is hitting the hospitality sector particularly hard.

The research revealed that the hospitality’s sector’s contribution to Britain’s GDP dropped 0.2 per cent between 2007 and 2013, mirroring a 6 per cent drop in lending from banks between 2008 and 2012.

Difficulty in securing bank loans has prompted many hospitality businesses to seek alternative finance , with great success. Chilango, for example, recently closed its crowdfunded Burrito Bond at £2m. 

Nicola Horlick, chief executive of crowdfunding service Money&Co, said:“Alternative finance, such as person-to-business lending, not only supports UK businesses, but also gives UK savers a new way to make their money grow.

"However, awareness of this sector remains low. Unlike the banks, which seem to be stifling growth, alternative finance has real potential to boost the UK economy."