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Funding for Lending to be 'heavily skewed' towards SMEs

24 April 2013

SMEs have the power to kick-start the UK economy, if only they can get hold of the funds they need to do it.

The Treasury and Bank of England have extended the Funding for Lending Scheme (FLS) until the end of January 2015 in the wake of criticism that it is not achieving some key targets. While the scheme has achieved some success among consumers seeking mortgages, it has yet to make any significant impact on the small and medium-sized enterprises (SMEs) sector for which it was primarily intended.

The government itself concedes that the improvement in credit conditions since summer 2012 has been less marked for SMEs than for larger businesses and households. So, in addition the scheme being extended for a further year, incentives to boost net lending will be "heavily skewed" towards SMEs, according to the Bank of England's announcement on Wednesday (April 24).

New allowances for drawings of credit in the extension period will be calculated on the basis of banks’ lending behaviour. For every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme during the extension period. And to encourage banks to lend to SMEs sooner rather than later, every £1 of net lending to SMEs during the remainder of 2013 will be worth £10 of initial borrowing allowance in 2014.

Engineering Employers' Federation chief executive, Terry Scuoler said the focus on expanding lending to SMEs is the right call. "Strengthening incentives for banks to lend to SMEs and other finance providers marks a step forward in addressing the problems faced by smaller firms in accessing credit on the right terms." He also believes giving FLS a longer shelf life is a helpful move.

“But there is still more to do," adds Mr Scuoler. "In particular, there must be greater transparency in reporting the impact of FLS on lending to SMEs. In addition, government must lead a more concerted effort to promote FLS to businesses, many of whom have been disengaged from banks.”

This beefing up of the FLS in favour of SMEs is no isolated gesture on the part of the Treasury. Other government departments have long since realised the importance of the SME sector, and new research from five leading business schools only goes to reinforce this fact.

According to a new report by Saïd Business School, Aston Business School, the University of Leeds, Manchester Metropolitan University Business School and UCL, the UK economy is sitting on ‘missing millions’ as too many small businesses remain static.

The report - Stimulating Small Business Growth - examines some positive results from the Goldman Sachs 10,000 Small Businesses programme, which reveals how small businesses could be the key to getting the UK economy back on its feet. It finds that the UK economy could receive a boost if its high-growth, small businesses can realise their full potential and catch up with their international counterparts.

Data released in last month's BDRC Finance Monitor for SME lending indicate ongoing problems with business banking in the UK, despite the efforts of the Treasury and Bank of England. The BDRC research showed that more than half (54 percent) of first-time applicants (FTAs) for a loan or overdraft were unsuccessful. This compared with 21 percent for non-FTAs seeking new or renewed facilities, and 8 percent for those renewing an existing facility over the last three years.

According to the Forum of Private Business (FPB), the figures showed a significant drop in approval rates for FTA lending, which in 2011 had a failure rate of 53 percent, and in 2010 just 42 percent. At the same time, the Monitor data showed a sizeable increase in personal cash used to finance a business venture, with 34 percent stating this was not through choice – a 9 percent increase compared to two years ago.

Meanwhile, for those lucky enough to secure loans, quite modest investments in technology can have a marked impact on the fortunes of a small business, according to new joint research from the Federation of Small Businesses (FSB) and the UK's technology sector trade association, Intellect.

The report - The Digital Imperative, Small Businesses, Technology and Growth - surveyed 2,200 people and found that on average small firms have spent around £3,500 on technology in the last 12 months, proving that investment doesn't have to break the bank to see rewards.

The research shows that 85 percent of small businesses identify investment in new technologies as a key driver for business growth. Around six in 10 (62 percent) said that it had a positive impact on how they communicate with existing customers and 53 percent believe it has helped in targeting new customers.

However, many small firms see a gap in the market for support and guidance and for access to appropriate products for small businesses. A quarter of businesses say that greater skill levels for themselves and their staff would help them invest more in technology, and the report finds that additional technology skills can derive greater productivity from staff.

The FSB and Intellect want to see Local Enterprise Partnerships (LEPs) use any funding to prioritise technology in plans for local growth. Each LEP should set out clear steps as to how they will support small businesses that want to upskill and use technology to grow their business.

The organisations also believe that a small business technology taskforce should be developed which provides events alongside private sector suppliers, to provide small firms with access to information and professional guidance to help optimise their use of, and investment in, technology.

FSB national policy chairman, Mike Cherry says that in order for small businesses to maximise the opportunities that technology presents, the understanding and skills of both the management and the workforce have to be addressed, and the new report gives clear recommendations about how to do that, he adds.

"What is obvious is that the amount invested doesn't need to break the bank, and that something as simple as improving the back office technology can have a positive impact on operations," says Mr Cherry. "We need to see action from the government and LEPs to help small firms take steps to invest and grow.

As an initial step, Intellect and the FSB plan to publish best practice guidelines on approaching investment in  technology for small businesses so that all companies will have access to clear and experienced advice. For more information click here.

Les Hunt

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