In July 2012, with Government support, the Bank of England launched Funding for Lending, a scheme which allows banks and building societies to borrow from the Bank of England at cheaper than market rates for up to four years. This helps them to increase lending to businesses by lowering interest rates and increasing access to credit.
The scheme creates incentives for banks to increase their lending. Businesses and banks are free to pass on the benefit in different ways. Some banks may offer specific business loans and mortgages linked to the scheme, such as fee-free, or lower loan-to-value products, whereas others may reduce interest rates or change the terms and conditions on existing products.
The Government is also now creating the new Business Bank that will become fully operational in Autumn 2014 to help to increase the amount of lending to businesses and provide more diverse sources of finance. There is a recognition that Small and Medium Sized enterprises (SMEs) often need loans or other forms of finance to grow their business, yet many find it difficult to access finance. Access to finance for SMEs and mid-sized businesses has been seriously challenging. Net lending to this sector is contracting. The Business Bank will bring together, and build upon, existing government schemes aimed at supporting access to finance for businesses under a single organisation. There will be a single entry point for all of the various government advice and support schemes.
The Business Bank has been allocated £1 billion of additional government funding, which will be managed alongside £2.9 billion of existing government commitments. A £300 million investment programme was launched in Spring 2013, which is focusing on encouraging new entrants into the lending market and the growth of smaller lenders.
The bank works through the wholesale market, and does not lend directly to, or invest in, businesses. It works with the private sector to increase levels of finance. Its success will be measured by its impact on attracting new finance for businesses and stimulating competition.
We are told by the Government that it has set an ambition to make the UK one of the best places to start, finance and grow a business, and that extensive reforms across the wider business environment in areas such as tax, regulation, planning, skills and infrastructure are helping to deliver this. The Government also envisages the business bank being its lasting champion for ensuring that the finance markets in the UK are serving the needs of UK businesses – integral to the Government’s growth ambitions and its industrial strategy.