The Bank of England has today announced that the Funding for Lending (FLS) scheme that was due to end in January 2014 will be extended for another year to 2015.
Background
Since the launch last August, the FLS seems to have had a positive impact on the availability of mortgages but has been severely criticised for failing to boost business lending.
The aim of the FLS is to encourage banks to lend by offering them cheap loans on the condition they pass them on to customers.
Bank of England figures suggest banks took nearly £14bn from the FLS between August and December last year.
However, lending from the participating banks was actually lower in that six month period, than it was in the six months before the scheme was introduced. In addition, as per the recently published Trends in Lending report from the Bank of England, net lending was down by £4.8bn in the 3 months to February!
Scheme extension
Given that growth in the UK economy is pretty much non-existent, and that the scheme was not doing anything to promote the lending supposedly needed to spark the growth, the BoE have come up with these further proposals in an effort to incentivise Banks to lend more!
It is probably little or no coincidence that this has been announced on the eve of what are likely to be another poor result in terms of GDP for the first three months of the year.
For every extra pound that banks lend to small companies, they will be able to borrow £5 very cheaply from the Bank of England, and £10 if that lending takes place this year.
The interest rate charged will be 0.75%, unless the Bank of England increases the Bank Rate from 0.5%).
Current business funding
My understanding from my own experience and from talking to many others is that if you take a sensibly thought out and planned business proposition to the Banks, and have the necessary security to pledge, there is every chance that you will receive funding.
What has changed is that the more speculative proposals, dependent upon one or more uncontrollable factors, are not going through as easily as they did in 2005/6 – but isn’t that how we got into this mess?
Bank problems
Isn’t the problem that the upheaval the UK and world economies went through five years ago was so big that the legacy problems continue to hold us back and will take years and even potentially decades to resolve?
Let us just remind ourselves that the UK economy is flat at best, the Eurozone is in recession, the US is saddled with a massive debt burden and China continues to slow.
It is a massive paradox that the Chinese communist (?) regime had not only provided the products that fuelled world demand, it also bought enormous amounts of US and other nation’s government bonds to facilitate these purchases! Ironically the Chinese are now semi dependent on the Americans to not only continue to buy their products but also to stay solvent enough to repay their debts!
This does not paint the greatest lending environment – for instance do we really want RBS, the bank that we, the taxpayer, own 80% of, to be lending to businesses that haven’t got a clear business strategy?
Unfortunately we have a whole world of bank problems; from not lending enough, to not having enough capital, to having a share price that has plummeted, to LIBOR fixing, to money laundering for Mexican drug barons etc etc…
Alternative funding
One of the major lessons I have learnt in business over the last 30 years is that there are always alternatives. The BoE have recognised this by extending the FLS outside of the Banks to the Asset based lending and invoice finance providers.
As with all things, knowledge of the market is everything, and you just need to know where to look, how to present yourself and the questions to ask.
As always, if you have would like to discuss any of the issues raised here or would like to share any of your own experiences on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: James.Stringer