The £80 billion Funding for Lending scheme, which was originally announced in June, will offer cut-price loans to banks and building societies who will subsequently be expected to lend to small companies as well as provide mortgage opportunities for homebuyers.
Money will be made available by the Bank of England (BoE) for a period of up to four years at a cost of just 0.25 per cent a year, but banks or building societies whose lending declines between now and the end of 2013 will be charged more.
The rate on the loan will rise by 0.25 per cent for every 1 per cent fall in lending to a maximum of 1.5 per cent.
Sources at the BoE say the scheme was designed to “incentivise banks and building societies to boost their lending to UK households and non-financial companies”.
Rob Donaldson, head of M&A and private equity at accountancy firm Baker Tilly says that the initiative is a ‘clever scheme’ which increases incentives for the banks to increase net lending to the business community.
However, he adds, ‘As far as UK entrepreneurs go, it’s too early to say whether this will have an impact. Unlike the mortgage market where there are “standard” products, each business loan is fairly bespoke. It will take time to see the effect.’
Edward Winterton, executive director at invoice finance company Bibby Financial Services, questions whether an increase in the availability of low-cost funds will do anything to benefit those businesses which are classified by traditional lenders as ‘high-risk’.
‘The Bank of England must closely monitor not only the levels of lending, but where the money is going to ensure this scheme does not become another of the government’s futile funding projects.’
Some believe the scheme should make it easier and cheaper for banks to lend, but that banking institutions also need to work closer with small businesses in order to take more calculated risks and provide access to finance at competitive rates.
Brendan Flattery, CEO of Sage UK and Ireland adds, ‘It will take time for perceptions to shift around the challenge of securing loans, and will only really change when business people see these government schemes delivering.
‘Until that happens there will be a lot of budding entrepreneurs who aren’t prepared to make the leap.’