We need a longer-term lending solution, says FPB

Should the Government be thinking about a 3i-style fund to help SMEs raise money after the recession?

Last Updated: 31 Aug 2010

The Forum for Private Business certainly seems to think so: in a submission to the Government’s Rowlands Growth Capital Review, the SME lobby group argues that small firms have been forced to cut so deeply that they’ll struggle to cope with an upturn – and unless the state steps in, perhaps through some kind of modern-day ICFC (what’s now 3i), there’s no way they’ll be able to get their hands on sufficient funding. We suppose it’s a good sign that thoughts are already turning to what happens after the recession – but we suspect some small firms are still more worried about the here and now…

The review, to be led by 3i’s Chris Rowlands, has been set up to consider whether state intervention will be required to help high-growth companies get access to funds as the economy starts picking up. With banks still reluctant to lend, the review will apparently consider whether some kind of Government-backed fund should step into the breach. That’s what happened after the Second World War, with the formation of the Industrial and Commercial Finance Corporation (which later merged with the Finance Corporation for Industry and became Investors In Industry – now known as 3i).

The FPB certainly seems keen; in fact it’s urging the Government to make more private and public funding available to small firms during the downturn. It argues that the problems they’re having getting access to finance will only get worse as the economy climbs out of recession; after cutting costs to the bone, the increase in demand will force them to take on more staff and buy more on credit, boosting their working capital requirements. ‘It is a fact that more small firms go out of business coming out of a recession that going in,’ bemoans the FPB.

And there’s no sign that things are improving with the banks, as shown by Alistair Darling’s latest attempt to crack some heads together this week. The BBA might protest that lending is up, but that doesn’t seem to be the experience of most SMEs. Take the much-vaunted Enterprise Finance Guarantee Scheme: take-up has been very low, because most SMEs aren’t actually eligible for it, according to accountants Smith & Williamson. Even those who are eligible are being asked for personal guarantees, as we wrote earlier this week – which not surprisingly directors are reluctant to give.

Since banks remain under orders to rebuild their balance sheets, it’s not surprising that lending has slowed to small firms, which are perceived as riskier propositions. So it seems logical that the Government may have to step in to fill that gap. On the other hand, since the Treasury’s basically skint too, having bailed out the banks, we’re not entirely sure where this fund is going to come from...

In today's bulletin:

Government's bank reforms are a waste of space, say MPs
BA plunges to £148m loss - can Walsh stop the rot?
We need a longer-term lending solution, says FPB
Are directors too cowardly about executive pay?
Learning from the voice of experience, with YouTube

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