“Small businesses struggling to access credit are to be given a welcome boost with £110 million of new funding, Vince Cable announced today.
The Business Secretary pledged £55 million of Government funding – through a scheme called the Business Finance Partnership – to peer-to-peer lenders and other finance suppliers. Match-funding from the private sector is expected to lever in a minimum of £55 million, making at least £110 million available to lend to small businesses over the coming years.”
So starts the press release from the Department for Business, Innovation and Skills released on December 12th 2012.
While the old saw holds that the “Devil is in the details”, unfortunately in this case the Devil is in the premise. In the very first sentence the release references the problem – small businesses struggling to access credit. The perception, fed from the general media, is that the main source of funding for business in the UK, the High Street Banks, have shut up shop and stopped lending at all.
Of course, this is nonsense. Banks lent more than £70bn to SMEs in the UK in 2011 and that number is expected to be near the same (or marginally lower) in 2012. In this context Mr. Cable’s £110m initiative represents approximately a 0.0014% dent in this requirement.
In fact if you add in the Government’s other funding programme, due to kick in a further £1.2bn for medium sized businesses, the total direct Government injection into the SME economy will stand at a measly 0.017% of the requirement.
No, the reason that many businesses are “struggling to access capital” is quite simply that lenders, all lenders, are being more careful to whom they lend depositors money. The raising of the lending criteria bar has had terrible and unintended consequences.
Many SMEs have just been through the most awful period of their existence and may have impairments in their trading history that simply make them very difficult to lend to in this climate. Unfortunately this situation will not be helped by the Business Finance Partnership, as Zopa, Funding Circle and the other selected recipients of these funds credit check in much the same way that a bank would and, I believe, are no more likely to lend to a businesses than traditional lenders on this basis.
These lenders will offer “average” rated firms loans at around a 10% rate of interest which, with base rates at 0.5%, seems attractive to the lender, but possibly less so to the borrower.
Now I will argue that any investment in UK SMEs is welcome going forward, and if the Government, ably represented by Mr. Cable, is going to open its ears to alternative methods of financing this critical element of our economy, then again this is welcome.
As a champion of pension-led funding, a bona-fide alternative source of business finance, I would simply urge Mr. Cable to get to grips with the real issues and then press on with many more of these initiatives.
Report card to date? Underwhelmed.