Credit support for small businesses extended

Thursday 3 December 2015

Small businesses in the UK are sure to welcome the news that the Bank of England has decided to extend its Funding for Lending Scheme (FLS) for another two years. The project has encouraged banks to give out loans to small and medium-sized enterprises (SMEs), but despite this it was scheduled to be cut at the beginning of next year.

However, this is no longer going to be the case. The Bank of England's governor Mark Carney has agreed with chancellor George Osborne to postpone the end of FLS until early 2018, prolonging this period of help for small businesses in need of finances. Up until the scheme's end date, the support will gradually be phased out.

This is intended to make it easier for SMEs to transition away from the financial help the credit scheme provides, rather than suddenly removing it. Lenders will have their access to funding gradually restricted over this time period, until the incentives for lending to smaller businesses are dropped altogether.

The current scheme sees £5 of funding given to banks for every £1 they loan to small businesses. This was intended to deal with poor conditions for lending back in 2012 and 2013, and appears to have so far worked well. Credit conditions for SMEs have been steadily improving since the FLS was introduced.

In fact, the Bank of England estimates that SME lending volumes have increased by £2.1 billion in 2015 so far. However, despite this it stated in a press release that "credit conditions for SMEs remain tighter than for large corporations", which has influenced the decision to extend the FLS for another two years.

Mr Osborne said the FLS "has been a vital part of supporting the recovery, ensuring lending to households and businesses", and that he was pleased to see it extended.

He added: "Given the improvement we’ve seen in credit conditions for households and large businesses, as our long-term economic plan moves from rescue to rebuild it is right that we continue to focus the scheme’s firepower on the small businesses that are the lifeblood of the economy."

The extension of the FLS is part of a series of initiatives designed to make it easier for small businesses to borrow money. These include expanding the British Business Bank, which was set up in 2012 and is an important source of funding for SMEs and new businesses.

The Bank of England is also looking to widen access to credit data, which will hopefully improve the quality of credit scores provided to trade creditors. This in turn will provide lenders with the information needed to make better decisions when it comes to granting SMEs loans.

Mr Carney said of the extension of the FLS: "As conditions have normalised for particular sectors over the life of the FLS, we have consistently reduced the scope of this temporary scheme and focussed support where it is needed most.
"The announcement today [November 30th] continues that tapering, supporting continued improvement in SME credit conditions as the economic recovery takes hold, while gradually withdrawing that support over the next two years.”

By Victoria McDonnell

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