PAC: SME lending schemes aren't coherent

Friday 24 January 2014

There is a lack of coherence among lending schemes designed to improve access to finance for small to medium-sized enterprises (SMEs), making life difficult for those setting up a business.

This is the opinion of the Public Accounts Committee (PAC) in its 38th report of the session, based on evidence from the Department of Business, Innovation and Skills (BIS), HM Treasury, the British Chambers of Commerce, the Federation of Small Businesses and Barclays Bank.

"Small and medium-sized enterprises have a vital role to play in driving the UK’s economic recovery, but despite government attempts to encourage lending to SMEs many still struggle to access the finance they need," Margaret Hodge, chair of the PAC, explained.

Figures show that the net lending of banks participating in the Funding for Lending scheme has dropped by £2.3 million since the scheme was launched, while the number and value of loans backed by Enterprise Finance Guarantee scheme have fallen each year between 2010 and 2013.

The problem stems from a failure to properly manage the issue, the PAC claims. "Departments manage their various schemes not as a coherent programme but simply as a series of ad hoc initiatives," Ms Hodge explained.

"There is no common understanding about which parts of the SME sector are generating the most growth and where government support would do most good. Departments were therefore unable to demonstrate that they are achieving best value for taxpayers’ money."

Historically, schemes have been created ad hoc to address particular market weaknesses, meaning no department has a view of what success will look like for the programme as a whole.

There are opportunities to turn things around, however, and the opening of the new British Business Bank is a chance to align SME initiatives.

Once operational, the bank will have £1 billion of capital at its disposal and will act as a major source of finance to SMEs.

"Government must use the establishment of the Bank to start managing departmental schemes as a coherent programme, clearly setting out what it wants to achieve, and how each scheme and the programme as a whole will contribute towards the overall objective of making it easier for SMEs to access the finance they need," Ms Hodge said.

Part of this will require departments to set out clearly what a successful impact on the market will look like and how it will be assessed in instances where a scheme is established to address a particular market failure.

Indeed, according to the PAC, there are opportunities to match interventions with the needs of SMEs. Currently, most funding is delivered via the banking system and while BIS has begun to explore forms of alternative financing, such as peer-to-peer lending, more can be done.

The PAC also recommends that the British Business Bank uses tailored interventions based on the evidence of SME changing finance needs.

Thus far, BIS hasn't gone far enough to ensure businesses have access to the information they need on the potential range of financing options available to them.

Consequently, there must be a clear strategy to enable SMEs to become aware of the appropriate funding options for their needs.

By Victoria McDonnell

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