Government should champion non-bank finance to help small firms
- Published on Tuesday, 28 February 2012 12:24
- Posted by Scott Buckler
With small firms still struggling to access finance and no short-term solution to increasing bank lending, it is time the Government look beyond the shores of the UK for imaginative solutions to finance the economic recovery and growth of UK-plc, says the Federation of Small Businesses (FSB)
In a new report ‘Alt+ Finance: small firms and access to finance', the FSB is calling on the Government to promote alternative forms of finance, such as peer-to-peer lending models, and to learn the lessons from other countries where routes to finance are varied, local, longer-term and reliable.
The report draws on examples of best practice from German and US banks that highlight fundamental weaknesses in the UK banking model: a lack of transparency and diversity of financial institutions as well as a limited local focus and control of lending decisions. The comparisons are stark: between 2007 and 2010 there was a 24 per cent fall in the number of successful loan applications for small businesses in the UK, compared to only a nine per cent decrease in Germany. A similar story emerges from the US, where its Small Business Administration's Government-backed loans for small businesses have been an important factor in its economic recovery plan.
To deliver similar benefits to UK small businesses, the FSB is calling for:
- An increase in the amount of peer-to-peer lending available with the Government assessing the possibility of opening up its own investor account to give the sector a boost.
- The Government to consider bringing asset backed finance into the Business Finance Partnership £1 billion fund. Around one in three small firms with external borrowing use this form of finance.
- Community Development Finance Institutions to be brought into the mainstream and for the Government to look at the success of the US in boosting this model through Government funding.
- The creation of a debt bond market for small businesses that need greater funding (upwards of £250,000) for fast growth utilising smaller investment exchanges.
Without a varied local financial system the FSB fears that the potential of credit easing will never truly be realised as Government struggles to distribute funds.And, with Independent Commission of Banking recommendations not kicking in for several years, it is more important than ever to bring forward innovative short term solutions, and get to work on the longer term task of building a new financial infrastructure with a local focus to protect our economy, innovation and jobs from future crises.
John Walker, National Chairman, Federation of Small Businesses, said:
"It is only when you compare bank lending in the UK to the situation in countries like Germany and the US that you can see the extent to which our banking system fails to deliver what small businesses need. Too much time has been spent tinkering with the existing system when it is perfectly clear that we need to develop alternative routes to finance.
"We need to accept that in its current form, our banking structure might never fully cater to the needs of the UK's business community. We need to build alternative routes that connect savers and investors with viable small businesses eager to grow, and thereby introduce innovation and competition to the sector.
"We challenge the Government to look for short term wins, such as helping existing peer-to-peer lenders scale up their operations, as well as thinking strategically about the longer term and the kind of financial infrastructure we need to underpin our economy and support small firms to grow. Our report puts forward a number of feasible suggestions to stimulate the debate. This thinking needs to start now in order to avoid a repeat of the last few years."
Tony Greenham, Head of Finance and Business at New Economics Foundation, said:
"Our one-size-fits-all banking system is dominated by a handful of large London-based national and international banks. Their global vision leads inevitably to many local blind-spots, and the UK has consistently underperformed our major industrial competitors when it comes to supporting SME finance and regional growth.
"We need a richer diversity of financial institutions and funding sources to suit the needs of our innovative and entrepreneurial smaller companies. This report moves the debate beyond berating big banks and offers instead a host of complementary and cutting-edge alternatives that can help the UK build a world-class domestic financial system to equal the City's status as a world-class international financial centre."