Getting banks lending
Funding for Lending scheme
In July 2012, with our support, the Bank of England launched Funding for Lending, a scheme which allows banks and building societies to borrow from the Bank of England at cheaper than market rates for up to four years. This helps them to increase lending to businesses by lowering interest rates and increasing access to credit.
In April 2013, alongside the Bank of England, we announced a one year extension to the Funding for lending, until January 2015, with incentives to boost lending towards small and medium sized enterprises (SMEs).
In November 2013, alongside the Bank of England we announced changes to the terms of the Funding for Lending Scheme extension, to further re-focus lending to small and medium sized enterprises (SMEs) in 2014.
Creating a new business bank
We’re creating a new business bank that will help to increase the amount of lending to businesses and provide more diverse sources of finance.
Small and medium sized businesses (SMEs) often need loans or other forms of finance to grow their business, yet many find it difficult to access finance. The business bank will bring together and build upon existing government schemes aimed at supporting access to finance for businesses under a single organisation. There will be a single entry point for the various government advice and support schemes.
The bank has £1 billion of additional government funding, which will be managed alongside £2.9 billion of existing government commitments. A £300 million investment programme will be launched in Spring 2013, which will focus on encouraging new entrants and the growth of smaller lenders in the market.
The bank will work through the wholesale market, and will not lend directly to or invest in businesses. It will work with the private sector to increase levels of finance. Its success will be measured by its impact on attracting new finance for businesses and stimulating competition.
The bank will be fully operational in Autumn 2014. For further information on the development of business bank see the March 2013 Building the Business Bank: Strategy Update.
The BIS Secretary of State, Vince Cable, asked a group chaired by Sir Peter Burt, former Chief Executive of the Bank of Scotland, to advise him on establishing the business bank. The Business Bank Advisory Group recommendations are accompanied by a background analysis overview paper.
For an overview of existing government schemes see SME Access to Finance Schemes: Measures to Support Small and Medium-Sized Enterprise Growth.
Enterprise Finance Guarantee (EFG)
EFG is a loan guarantee scheme which enables banks and other lenders to lend to small businesses that lack the security or proven track record to be offered a normal commercial loan.
It’s not a replacement for commercial products and is designed to account for 1% to 2% of total lending to SMEs.
We provide lenders with a 75% guarantee on each individual loan issued under the scheme, subject to a 20% limit on total claims arising from a lender’s portfolio. This shares the risk of the loan defaulting between the business (who pays a premium), the government and the lender.
Currently 46 lenders are part of the scheme, including all main UK high street banks, community development finance institutions and invoice finance providers, who are responsible for lending decisions.
EFG was extended in 2012 to include businesses with a turnover of £41 million (previously it was £25 million). We also removed the maximum £1 million lifetime EFG loan limit, replacing it with a rolling £1 million maximum limit.
To increase lending further, we raised the level of the lenders’ EFG loan portfolios to which the government guarantee applies from 13% to 20% for financial year 2012 to 2013.
This scheme will run to 2014 to 15, subject to demand, providing up to £2 billion of additional lending.
Businesses can go to an accredited lender directly, and they will decide whether they are able to lend under their own terms and conditions.
See detailed Enterprise Finance Guarantee guidance.
Working with banks
We’re also working with the British Bankers’ Association on a range of changes to improve the standards small businesses can expect from their banks. This partnership is known as the Business Finance Taskforce.
The Taskforce aims to get banks working differently so that they can help SMEs. Benefits include:
- being able to ask their bank directly for an appeal if they’re refused a loan
- being able to ask the banks what they’re lending
- getting help and advice on getting a loan from the better business finance website.