The ‘Funding for Lending’ Scheme is getting an extension. The Banks are lending more to small to medium sized businesses across the UK, but from what starting point?
Easy is not a word that entrepreneurs and SME owners expect to have in their vocabulary. Despite all odds, they pursue ideas and turn them into businesses that significantly contribute to the UK economy. A common difficulty they face is obtaining adequate funding. Fortunately, the Bank of England’s Funding for Lending Scheme (FLS) may make it, if not easy, then at least easier, to secure business loans.
What is the Funding for Lending Scheme?
Encouraging Lending in the UK
In an effort to provide a boost the economy and increasing lending, the Bank of England implemented the Funding for Lending Scheme in 2012. This allowed commercial banks to borrow funds from the BoE at a reduced rate. The banks could then pass these savings on to their consumer and business users in the form of inexpensive loans.
The Lowdown on Funding for Lending Scheme (FLS)
If banks choose to participate in the Funding for Lending Scheme, they approach the Bank of England with assets they already have, such as loans. BoE swaps the assets for 4-year Treasury bills. The banks can use the Treasury bills as secure backing, which enables them to borrow cash in the wholesale financial markets at steeply lower rates. Initially, FLS was available to households, but in 2013, the government amended the scheme. They ended support for mortgages in an effort to cool off the housing market and prevent a bubble from forming.
Is Funding for Lending Working for Small Businesses?
In the last quarter of 2014, lending to small businesses fell by a discouraging £800 million. The first quarter of 2015, though, heralded in a strong increase. Lending rose by £635 million. Most of this is attributed to contributions by Lloyd’s Banking Group (£409 million), RBS Group (£136 million) and Shawbrook Bank (£107 million). According to a statement issued by the Bank of England, “A number of institutions expanded their lending in Q1 2015 and further borrowing allowances of £4.9 billion have been generated.” Many experts regard the quarter one results as a success and see the FLS as strengthening the UK economy. Senior UK economist at Capital Economics, Samuel Tombs, says:
The Funding for Lending Scheme now appears to be successfully incentivising banks to lend more to SMEs. While net lending to SMEs has only risen for one quarter so far, with business confidence high, borrowing rates still low and consumer demand growing strongly, both small and larger businesses alike are likely to seek more credit in order to expand over the rest of 2015.
Another Year for Funding for Lending Scheme
The Treasury extended the Funding for Lending Scheme for another year; the drawdown window now remains open until 29 January 2016. Many predict this extension will push another £1 billion in funds available to SMEs, helping small businesses weather overall economic “stress,” if that should become a more pressing issue. As encouraging as this news is, there is work yet to be done. John Longworth, director-general of the British Chamber of Commerce says, “[I]f our young, fast-growing businesses are to reach their potential, then much more needs to be done to make sure they can get access to the finance they need. We need to have the funding mechanisms to back their ambition.” Longworth advocates:
- Improved competition among banks, giving business owners the best options for affordable funding.
- Improved access to retail bond markets.
- Sufficient backing for the British Business Bank (a state-owned PLC that supports business development).
If you require funding to start a business, or to grow and expand yours, now may be the ideal time to apply for a loan. Conditions are favourable, and more banks are willing to take a “risk” on small and medium enterprises. Entrepreneurship and running a business of any size is never easy. Proper funding, though, can make it easier. To understand why invoice finance may just be the answer go to this page.
The Funding for Lending Scheme is giving more leaders and owners the capital they need to compete – and to continue contributing to the UK economy.