Osborne pledges ‘boost’ for firms with FLS shake-up
The Funding for Lending scheme (FLS), which launched last year in a bid to ease the flow of credit to cash-strapped businesses and households, has been criticised for failing to increase lending to small firms, but the Chancellor insisted his plans would give “a big boost for the small and medium-sized businesses that are at the heart of the British economy”.
Official figures show that net lending to businesses shrank by £2.8 billion in February, following a £300 million contraction the previous month, putting pressure on the Bank of England and Treasury to revamp the FLS.
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Hide AdAlong with a one-year extension, until January 2015, the initiative will look to encourage banks to direct more lending towards small firms by offering access to additional discounted funds.
Howard Archer, chief UK and European economist at IHS Global Insight, said the extension was a “welcome and well-thought-out move,” adding it was “vitally important” for growth that companies could borrow at a “non-punishing interest rate”.
Under the scheme, banks can access low-interest funding in return for lending to households and businesses. Now they have been told that the amount of funding available will increase sharply based on lending to SMEs – defined as firms with a turnover of less than £25m.
The changes mean banks will be able to borrow £5 from the FLS for every £1 in net lending they make to small firms next year. To encourage lending to SMEs “sooner rather than later”, every £1 of net lending for the rest of this year will be worth £10 of extra borrowing in 2014.
Matthew Fell, the CBI’s director for competitive markets, said: “The additional incentives for banks should accelerate activity in the small business financing market.
“But we need to be realistic – FLS is only one piece of the finance jigsaw. Boosting firms’ confidence by raising awareness of the various funding schemes available is critical.”
The FLS extension means financial leasing companies and factoring corporations will be allowed to access the scheme, which is currently only available to banks and building societies.
Louise Beaumont, co-founder of invoice finance firm Platform Black, said: “While we’re delighted to see the scheme opened up to alternative funders, our concern remains that Britain continues to suffer because it has a very highly concentrated banking system – around 90 per cent of all business finance goes through a handful of giant banks.”
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Hide AdJohn Longworth, director general of the British Chambers of Commerce, also welcomed the extension, but added: “Much will depend on lenders’ appetite for risk, and we will have to wait and see whether these new
measures help get credit flowing to growing businesses – and not just ‘safe bets’.”
Shadow Treasury minister Chris Leslie said: “Labour called for reforms to this scheme last year, so these belated changes are welcome.
“But with net lending to businesses down by £4.8bn in the last three months alone they do not go far enough.”