Will Vince’s new business bank be third time lucky for cash-strapped SMEs?
Business Secretary Vince Cable’s announcement of an extra £1bn funding for small businesses is the government’s latest attempt to free up much-needed cash to companies that have been unable to persuade the High Street banks to lend to them.
It is the third initiative announced by the government this year. It comes only a couple of months after it unveiled the Funding for Lending scheme, which itself replaced the National Loan Guarantee Scheme (external link) revealed in March. Confused? You’ve every right to be, because there was also Project Merlin and the Enterprise Finance Guarantee Scheme before that. But all these previous quick fixes swiftly came unstuck when it became clear that the major banks were refusing to play along.
The details behind the new “business bank” won’t be announced until the government’s Autumn Statement in December, but the government hopes the bank will be privately owned and run and that the public money will be at least matched by private sector investment, which will be able to underwrite up to £10 billion in small business loans.
Why will it be privately owned and run? Because the government doesn’t want to carry the outstanding loans on its own balance sheet. Many may think that has uncomfortable echoes with the past, but with the economy back in recession and the government’s borrowing targets under threat, it has little room for manoeuvre.
But the new bank won’t be up and running for 18 months, so won’t be able to help firms that are struggling to get loans now. It won’t actually make any loans itself either. Instead it will buy up loans made by the commercial banks to SMEs and will package them into bonds to be sold to institutional investors.
But will it work? It aims to provide long-term lending for small firms, by bringing together long-term investors, like pension funds, and small businesses that need assured funds to expand. The US and Germany already have similar banks.
The CBI, the British Chambers of Commerce (external link), the Federation of Small Businesses, even the TUC, have applauded the government’s announcement. “The big gripe today from many growth businesses is a gap in the market for long-term investment finance,” said John Cridland, the CBI Director General.
If successful, a new government-backed boutique investment bank could provide what British firms have sorely needed for so long: guaranteed long-term loans that they can use to plan their growth in the years ahead, safe in the knowledge that they won’t be withdrawn by jittery banks if the economy takes another turn for the worse.
The new business bank seems to be focused on existing businesses that need extra capital to expand, rather than on start-ups. This is great news for growth but the government also needs to consider ways to help entrepreneurs with good new business ideas to help kickstart the economy as well as those that are already up and running.