Will the Funding for Lending scheme take off?

The latest government inititative intends to prise money out of the banks' coffers and into small and medium-sized businesses, but will it succeed?

The £80 billion Funding for Lending scheme, which was originally announced in June, will see the Bank of England offer cut-price loans to banks and building societies, money which is expected to be channelled to small companies.

Some organisations are welcoming the news, with the Confederation of British Industry saying that the initiative should support banks to make finance more affordable to businesses and consumers, while also encouraging banks to lend more.

The organisation views the scheme as likely to naturally replace the National Loan Guarantee Scheme over time, saying that it is open to a broader range of firms.

How significant is this, though, for the smaller businesses, who are among the purported recipients of the loans? Will an increase in the availability of low-cost funds do anything to benefit those businesses which are classified by traditional lenders as ‘high-risk’?

Additionally, the idea of taking on debt – even when any is available to them – is often an unpalatable notion for young companies given the unpredictable nature of early-stage cash flow. Should debt be thrown at businesses like this, creating the illusion that the smallest companies have as much a chance of attaining finance as those considered less risky? 

On the plus side, you would have thought banks will be pressured into greater loan activity, as those banks whose lending declines between now and the end of 2013 will be hit for more than the 0.25 per cent per year rate being charged to them by the Bank of England.

I suppose this could mean more chance of funding for those businesses just big enough to have previously been a borderline decision for financing. But we may still be waiting for the definitive initiative that gives more small businesses a realistic chance of getting the cash injection they need to develop.

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