Small business lending is still terrible, say MPs

Project Merlin didn't work, Funding for Lending hasn't worked. Is there any way to persuade banks to lend to small firms?

by Emma Haslett
Last Updated: 29 May 2014

Just when we thought everything was going so well comes less-than-encouraging news from the government’s Public Accounts Committee, which reckons small business lending is still deeply unimpressive.

According to a report by the committee, the Funding for Lending scheme – whereby banks are given cheap money by the government on the understanding that they will lend it out equally cheaply – hasn’t worked quite as anticipated. The report suggested net lending under the scheme has fallen £2.3bn since June 2012: not exactly what ministers had in mind when they introduced it.

The scheme was originally introduced to allow both businesses and individuals to borrow cheaply – but that meant much of the funding was requisitioned by the Help to Buy scheme and its predecessors, while businesses missed out. In November, that was changed so that banks could no longer use the funding to lend to individuals.

The latest figures available are for December, so it’s too early to tell whether the change has had an effect on small business lending – but the committee doesn’t seem optimistic.

‘Many [small businesses] still struggle to access the finance they need,’ said the committee’s chair, Margaret Hodge. ‘[Government] departments manage their various schemes not as a coherent programme but as a series of ad hoc initiatives.’

A couple of interesting points come out of the report: firstly, that virtually no-one seems to know exactly how much small businesses are receiving under government schemes.

‘For some of the schemes, the amount of funding reaching UK SMEs is either unknown by the departments or appears lower than we would have expected,’ it says.

‘HM Treasury does not currently have any information on the number or value of loans to SMEs under the [Funding for Lending] scheme. The UK Innovation Investment Fund has received £150m of taxpayers’ money but UK companies account for only 40% of the total number of the fund’s investments. BIS could not tell use the total cost of management fees paid to administer this fund. We heard from BIS that it was often easier for lenders to make larger investments than small ones. Moreover, we did not hear what BIS is doing to encourage smaller investments by lenders and funders.’ So it looks like departments are taking this problem nice and seriously…

The second point is that a quick look at the latest Funding for Lending figures suggests that although the number of loans hasn’t risen, borrowing is at least becoming cheaper. This graph shows the distribution of loan rates offered to small businesses:

Source: Bank of England, FSB

The government’s tried gentle persuasion, in the form of Project Merlin, and it’s tried bribery, in the form of Funding for Lending. Ministers are going to have to come up with something else…

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