Today’s news that the Bank of England will offer UK banks billions of pounds in cheap loans to lend to hard-pressed small businesses is potentially very good news for the SME sector. But the big question remains: will small businesses actually benefit from this new initiative?

Bank of England Governor Sir Mervyn King’s previous attempts to inject money into the financial system to help kick start the UK economy through Quantitative Easing have been hindered by the Eurozone crisis and the faltering global economy.

But the failure of past initiatives to increase loans to SMEs have showed that neither the government nor the Bank of England can make banks lend money to small firms if they are worried about whether they are likely to get it back.
The economic situation has not changed much since last year’s Project Merlin, when banks blamed the reluctance of many SMEs to borrow more money in such uncertain times for their failure to meet the government’s target of lending £75 billion to small businesses.

The fact remains that banks are likely to remain nervous about lending money to those businesses that are most desperate to borrow it – the ones who need it to stay afloat or to set up new firms.
They should consider using the Bank of England’s new lending plan to back more entrepreneurs with new but credible business ideas as well as those who are looking for capital to expand their existing companies. We need more good start-ups to help us create more jobs and to grow the economy.

The scheme could be a great opportunity for ambitious small firms that have identified a really good growth opportunity but who need funding. Providing they remember the Three Golden Rules I blogged about (know your target market, know your competition and serve your customers better than anyone else), which apply just as much to entering a new market as to starting from scratch, and if they put together a compelling business plan they stand a good chance of getting the cash they need to expand.