New business finance scheme may not benefit many firms

Posted on 3 Aug, 2012

The Funding for Lending Scheme (FLS), which began operating on 1 August, was launched three weeks ago by the Bank of England and HM Treasury. Its objective is to make borrowing more affordable both to businesses and homeowners, by giving leading banks access to cheaper credit. The banks will, in turn, lend this money through mortgages and loans at attractive rates of interest.

The outcome of the scheme, it is hoped, will be economic growth, as firms borrow money to invest and consumer mortgages boost the housing market.

Yet another credit scheme

However, the Funding for Lending Scheme could create confusion, said Clive Lewis, Head of Enterprise at the Institute of Chartered Accountants (ICAEW). “There are already a number of existing schemes that the government has to offer,” said Lewis.

He is referring to initiatives such as the National Loan Guarantee Scheme, which is lending over £2.5 billion to 16,000 firms, and the Enterprise Finance Guarantee that began in 2009 and has been used by over 18,000 firms.

All of these schemes share the common goal of trying to make commercial finance more affordable. But when it comes to the new FLS, Lewis said: “With the new scheme it is worth noting that it is entirely the banks’ decision as to if a business is eligible. FLS offers the possibility of cheaper finance but supply will still be an issue especially for start-ups with poor credit records.”

Businesses encouraged to seek alternative sources of funding

For several years now, small and medium-sized firms and their representatives, such as the Federation of Small Businesses, have complained that the banks are unwilling to lend to firms.

While the FLS is aimed at boosting lending, it may not help the many businesses who want to borrow but can’t meet the strict criteria laid down by the banks. The difficulty in getting loans from banks has discouraged businesses from approaching them.

Lewis recognises this and said: “Given companies’ current wariness of the various banks and lending, we would encourage businesses to look at all the alternative sources of finance in addition to bank finance.”

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