Credit easing must be bold to ensure it helps small businesses
The Government must be bold in its development of credit easing, ensuring that it is separate from the banks, affordable and available as soon as possible to help small businesses, says the Federation of Small Businesses (FSB). Even though the banks have signed up to the Project Merlin agreement to meet lending targets, many small firms are not getting the credit they need, as the banks failed to meet the half year targets set. As a result, the Chancellor announced that the Treasury would look into credit easing, to make access to finance easier, particularly for small firms.
Only 15 % of respondents to the latest FSB survey have gone to the banks for finance in the past two months. Of these, half had their application accepted but more than a third (34%) were refused. Previous FSB research has shown that businesses that have not secured all the finance they applied for continued to have money worries (40%), missed their growth opportunities (31%) and have delayed their investment plans (21%).
In a new paper, FSB credit easing viewpoint, which will form part of its submission ahead of the Autumn Statement, the FSB lays out the ways which it believes the Government can deliver credit easing to benefit the smallest of businesses.
Treasury is looking at the direct purchase of corporate bonds in small and medium sized enterprises, through the creation of a new market as one way to make the credit easing scheme work. The FSB believes that this would miss the very smallest of businesses that need access to small amounts of finance, as those businesses would not have the manpower to develop bonds. And, the value of bonds from a micro firm would also not be large enough to prove efficient for the Government to be a bond investor.
To deliver the scheme, the FSB proposes that the Government look at more creative methods which could use existing Government lending agencies. This could include scaling-up existing Government lending schemes such as the successful Enterprise Finance Guarantee and the Exports Credit Guarantee Department, bringing in back-office capabilities, possibly from a bank.
However, the FSB is urging the Government to ensure that the scheme has three core principles to guarantee its success and so it reaches the businesses that need it most:
- Boost competition: in line with the Independent Commission on Banking’s recommendations, Government intervention should encourage competition in the market and aim to address the market dominance of a few large players
- Increasing access to credit for the smallest companies: the scheme should improve the supply and price of credit to the lower end of the market – loan values of less than £25,000, where the majority of demand lies and where firms have had particular problems raising finance, as a key objective
- Community development: where possible, Government intervention should aim to improve the flow of credit to ‘hard to reach’ sectors of the economy such as rural areas and areas that have experienced industrial decline
Ken Moon, Chairman of the FSB’s Wessex Region, said: “For credit easing to have any impact, it must be bold and look to boost competition by stimulating innovative models that are coming onto the market, such as peer-to-peer lending and smaller internet banks. Analysis of small businesses lending shows that it’s the smallest of firms that are getting the worse deal – they’re paying more and they’re more likely to be refused. For credit easing to work it needs to benefit the smallest of businesses as well as medium-sized ones. However, if it is run through the main high street banks, that already dominate the small business market, we fear that businesses will be put off applying for it and so wouldn’t have the impact needed to make a difference. If thought through properly, this scheme could be really useful. The FSB would like the Government to establish a scheme which is universal so that all businesses, whatever their size, sector or status can access it. It needs to be something that can be easily set up, for example, using existing Government schemes as its backbone and it must be at arm’s length from the banks.” For full information , go to www.fsb.org.uk/fsb-survey-