The current unwillingness of the major banks to lend to start-ups and small business has been well documented. Securing funding is the biggest problem for start-ups at the moment. This has contributed to the rising popularity of crowdfunding and alternative peer to peer funding schemes. While the UK government has given financial backing to some of these schemes they have also been trying to fix the problem at source and get the banks to start lending again.
Way back in March the government launched the National Loan Guarantee Scheme to try and stimulate bank lending to small businesses. The basic deal here was that the high street banks would go and borrow money from the international markets. The UK Treasury would guarantee that these loans would be repaid if the money was lent out to SMEs (using the EU definition of an SME having a turnover under £50 million). At the end of July this was extended to include businesses with a turnover up to £250 million. However only weeks after the scheme was extended it has been announced that it is going to be ‘wound down’.
At first glance it looks as though the National Loan Guarantee Scheme was a success. In its first four months £2.5 billion worth of bank loans for SMEs were guaranteed by the Treasury. Set against a total guarantee pot of £20 billion for the whole scheme this looks fairly impressive. However, overall lending to UK businesses actually fell by around £3 billion over the same period. In short although the banks took advantage of the scheme to protect the loans they were making they continued to reduce the number of loans to businesses. Effectively all the scheme achieved was to make the little lending the banks were doing cheaper and less risky for the banks.
The point of the scheme, of course, had been to solve the problem of start-ups and small businesses being unable to borrow money. As the National Loan Guarantee Scheme has clearly failed to do this it is being replaced with Funding for Lending. Funding for Lending sees the UK government taking a much more active role in the process. The National Loan Guarantee Scheme depended on banks borrowing money from the open market and passing this money onto SMEs. Funding for Lending is going to let them borrow from the Bank of England direct and at below market rates.
Essentially this is the taxpayer giving the banks cheap loans so that the banks can lend that money to homeowners and businesses. In exchange the Bank of England will receive assets from the banks in the form of mortgage contracts and other debts. As with the National Loan Guarantee Scheme there is a danger that the banks will just use these loans to subsidise their existing operations and not increase lending. Therefore Funding for Lending has a number of incentives built in. The amount that the banks borrow, and how much it costs them, will depend on how much they lend out. The more they lend, the more they can borrow and the cheaper it gets.
Unlike the National Loan Guarantee Scheme, Funding for Lending is not limited to small businesses or businesses at all. One of the stated goals of the Funding for Lending scheme is to reduce the costs of mortgages in order to stimulate the housing market. The other stated goal is to lend to ‘business’ generally. Ultimately, like the National Loan Guarantee scheme, how much money makes it into the hands of small business will depend on the banks willingness to lend. Offering the banks low risk cheap money did not work, so hopefully offering them direct access to even cheaper money will. Only time will tell.