The Bank of England and HM Treasury launched the Funding for Lending Scheme earlier this month.

The scheme, launched on 13th July, is designed to increase the incentives for banks and building societies to lend to UK households and non-financial companies.  The scheme operates by allowing banks to borrow money from the Bank of England at a reduced rate, which in turn allows the Banks to provide loans at a cheaper rate themselves.

From 1st August 2012 to 31st January 2014, banks will be able to borrow money from the Bank of England at below market-rates.  These funds will be lent for up to four years and will be secured by providing collateral, such as existing loans to businesses and households, to the Bank of England.  To ensure the risk from the loans remains the responsibility of the banks, the collateral will be swapped back when the loans from the Bank of England have matured at the end of maximum four year period.

The British Bankers’ Association, which represents the UK’s banks, said it welcomed the scheme: “The UK’s lending market is very competitive – and with support through schemes like the FLS [Funding for Lending Scheme] for even lower cost borrowing, now is a very good time for UK businesses to speak to a bank about their financial needs.’

The UK Treasury said the scheme had started well. A spokesperson said: “The FLS has got off to a flying start, with 13 banks and building societies already signed up. Combined they can access £60bn of funding in the scheme, and that is just the beginning”.

It is intended that the scheme will supersede the current National Loan Guarantee Scheme (NLGS), which was only launched in March 2012. The NLGS hasn’t been as successful in lending to businesses as the Chancellor had hoped; with UK bank-lending projections forecasting a decline in lending over the next 18 months.

It has been an uphill struggle for many owner managed businesses across the UK in recent times. The continuing financial crisis has hit banks’ access to funding on the open markets, making it more difficult and more expensive for businesses to borrow. It is hoped that the introduction of this scheme, along with the Seed Enterprise Investment Scheme (SEIS), launched earlier this year, will improve the picture for growing businesses.

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By Debbie King, Corporate Lawyer in Lancashire