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Banks given state subsidies to help small business
Banks have been handed generous taxpayer-backed incentives to boost lending to small businesses under a revamped Funding for Lending scheme that the Chancellor claimed will “support the real economy”.

High street lenders will be offered £10 of state-subsidised funding for every £1 they lend to small companies this year, as part of an enhanced FLS that will be extended by a year to January 2015 and expanded to include specialist finance houses that provide companies with vital working capital.

George Osborne said: “This is a big boost for the small and medium sized businesses that are at the heart of the British economy.”

The scheme was unveiled ahead of today’s critical GDP figures, which will reveal whether the UK crashed into a triple dip recession in the first three months of the year. Economists expect the Chancellor to avoid embarrassment by the skin of his teeth, with growth of 0.1pc, but they pointed out that the underlying picture is of a “flat-lining” economy.

Details of the enhanced FLS came after the British Bankers Association reported that business lending fell by £702m in March, following a £1.9bn drop in February. “The data highlight why the Bank and the Treasury felt the need to extend the FLS with particular emphasis on incentivising lending to smaller and medium-sized companies,” Howard Archer, UK economist at IHS Global Insight, said.

A separate survey by insolvency expert Begbies Traynor found that the number of small companies which secured new lending in the first quarter of the year fell by 11pc compared with the last three months of 2012.

The originaly £80bn FLS has generally been considered a success, having helped lower mortgage rates by about 1pc since its launch last August, but it has had limited impact on businesses. Housing transactions have increased by 13pc since August but small business lending is declining at about 3pc a year.

The scheme extension, which will shift the focus to small businesses, will come into effect next February and last one year. Under the new terms, for every £1 of extra lending to households, big businesses or specialist finance houses for the rest of this year and all of 2014, banks will receive £1 of subsidised funding in 2014.

But for every £1 of lending to small businesses this year, they will get £10 of cheap credit. And for every £1 of small firm lending next year, they will qualify for £5 of FLS funding.

John Cridland, director general of the CBI, said: “The key thing to help small businesses now is to make lending that bit cheaper. The change to the rule is cute to say if you lend more this year, you’ll get more next year. That will help give an incentive to provide more of these slightly cheaper loans.”

Business groups also welcomed the decision to expand the companies to which banks can lend to include asset based lenders, which provide small companies about £20bn of working capital every year – secured against invoices and machinery.

However, Bank Governor Sir Mervyn King stressed that banks needed to rebuild their loss-absorbing capital buffers. The FLS was, he said, “a complement to, not a substitute for, ensuring our banks are adequately capitalised”.

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