The Funding for Lending Scheme (the “FLS”) was launched jointly by the Bank of England and HM Treasury in July 2012; its aim was to improve access to credit for a wide range of parties by providing an £80bn funding backstop and incentivising banks and building societies to boost their lending.
Mortgage and other household lending levels bounced back more quickly than commercial lending; to reflect this, the FLS was first tapered in November 2013 to remove household lending incentives. During 2014, credit conditions eased for larger corporates, partly due to the price of bank funding and partly due to greater access for larger corporates to non-bank sources of finance, such as share and bond issuances.
However these alternative sources of finance are less readily available to small- and medium-sized enterprises (“SMEs”). Although bank lending to SMEs did show an upswing during 2014, it was less marked than for other lending sectors.
As such, in December 2014 it was announced that the FLS would be further tapered to remove larger corporate lending from its scope, but contrary to some expectations, that it would remain in place in respect of SME lending (that is, lending either directly to SMEs or to financial leasing corporations and factoring corporations that in turn fund SMEs) initially until January 2016, but this has subsequently been extended until January 2018.
Throughout the short history of the FLS there have been complaints as to some of its side-effects; chief amongst them is that the cheaper funding available from the Bank of England has made banks and building societies less dependent on deposit-taking and therefore less incentivised to offer better interest rates to savers. Other concerns have been raised in relation to tax payer protections. However these have been assuaged by the fact that the collateral pledged by the banks and building societies when borrowing from the Bank of England must be worth more than the amount borrowed (the equivalent of a “loan to value” concept on a residential mortgage).
Despite the FLS, wider complaints persist that bank funding can still be difficult for SMEs to access. An Institute of Director’s survey recorded that four out of five business directors believed that it was too difficult to obtain funding through traditional means, but is this a case of perception not reflecting reality? The survey suggests that many business owners turn to family, friends and credit cards ahead of pursuing bank finance, with just one third turning to their bank for a loan or overdraft. However, of those that did apply to their bank, over two thirds were accepted.
Although the benefits of the FLS have been seen more slowly in the SME sector, they are nevertheless apparent. It should also be remembered that the FLS, although scheduled to cease in January 2018, is not operating in a vacuum; it sits alongside other initiatives to stimulate SME lending. These include the British Business Bank’s enterprise finance guarantee (by which the Bank guarantees the repayment of a proportion of a qualifying SME’s loan) and investment arm (which invests in non-bank lenders and venture capital funds), the section 4 of the Small Business, Enterprise and Employment Act 2015 (which requires wider sharing of SME customer credit information between credit reference agencies) and the ongoing joint Bank of England and European Central Bank initiative to stimulate the European securitisation markets.
We advise on a wide variety of financial transactions including secured lending, asset based lending and invoice discounting for various types of client. If you would like to discuss the above, or any other banking and finance issues, the Wright Hassall Banking and Finance team would be delighted to help.