Government asks small lenders to fund the Big Society

The Coalition has increased the level of protection for small lenders, so it'll be easier for them to pitch in where banks can't.

by James Taylor
Last Updated: 19 Aug 2013
They may not be very well known, but Community Development Finance Institutions have an important role to play: they're independent (typically not-for-profit) groups that act as micro-lenders within a specific community, providing loans to start-ups and enterpreneurs who can't get money via the usual channels. Now they've been given a boost by business minister Mark Prisk, who's just announced new measures designed to make it less risky for them to lend - the idea being that this will encourage them to dole out more cash. Always welcome...

CDFIs are all very Big Society: they’re designed to boost economic activity within a particular community, by providing small amounts of finance so people can start a business or gain the qualifications they need to go back to work and get their lives back on track. Now Prisk wants these bodies to be able to play a more substantial role, and he's come up with a few ideas to make that happen.

For a start, he's changed the rules to give CDFIs greater access to the Enterprise Finance Guarantee, the Government scheme that guarantees 75% of the value a loan made to SMEs. CDFIs will now have greater protection for the first £1m they lend via the scheme - the Government is now promising to cover 20% of the cost if loans default, up from the previous 13%. Prisk is also issuing new guidance to allow CDFIs to take advantage of a little-known aspect of the EFG, which allows banks to lend them directly without having to pay the normal 2% premium. And finally, he's also encouraging CDFIs to bid for money from the Government's new Regional Growth Funds, and to get involved with its new (and much-vaunted) Big Society Bank.

This is all quite technical stuff, which you may need to be an accountant to get really excited about. But the point is this: the net effect of these measures should be that CDFIs - who typically make riskier loans than other lenders - have a bit more protection if the loans go bad. And hopefully, this should make it easier for them to lend to viable small firms who can't get credit elsewhere. Last year, according to their trade body, CDFIs made 19,000 loans worth £200m and helped to create 2,000 businesses, which in turn created 8,600 jobs. So anything that boosts their capacity to lend is probably a good thing.

It won't affect everyone, of course: a new survey by accountancy Baker Tilly found that 55% of the 516 SMES spoken to feel ‘all or most’ of their needs have been met by their banks over the last year. But that still leaves a sizeable number who are feeling under-served - and this is the gap that CDFIs can hopefully help to fill.

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