Last month, the Bank of England and the HM Treasury announced an extension to the Funding for Lending Scheme (FLS) by one year until 31st January 2015.
The FLS launched on 13th July 2012 and is designed to increase the incentives for banks and building societies (Banks) to lend to UK households and non-financial companies. The FLS 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.
In addition to the FLS being extended, two further changes to the FLS have also been announced.
Firstly, the Banks are being encouraged to lend more to SMEs. For every Â£1 of net lending to SMEs in 2014, Banks will be able to draw Â£5 from the FLS. Furthermore, to encourage banks to lend to SMEs “sooner rather than later’, every Â£1 of net lending to SMEs during the remainder of 2013 will be worth Â£10 of initial borrowing allowance in 2014.
Secondly, the FLS has been expanding to non-banks such as leasing companies meaning they will be able to access cheaper funding through the FLS for the first time.
The remaining provisions of the FLS remain the same.
The Governor of the Bank of England said about the extension: “The FLS has contributed to a sharp fall in bank funding costs and an improvement in credit conditions since the middle of last year. The changes announced today build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015. I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase. Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised.”
The Chancellor of the Exchequer said: “This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.’
As an adviser to many SMEs across the UK, I welcome the news regarding the extension and the changes to the FLS. However, I still believe more needs to be done to increase lending to SMEs, if this is to have a significant impact on the economy.