The Small Business Bank - boost or bust?

The Liberal Democrats have announced plans for a new, state-backed bank to provide finance to small businesses.

The announcement, made during the Liberal Democrat party conference, will form the new backbone of the government’s efforts to increase lending to SMEs. The problem of depressed lending has stuck in the coalition’s craw since it came to power, but Tory and Lib Dem politicians hope that the new initiative will help to get credit flowing again.

The Treasury has already set aside £1 billion to help fund the bank, which business secretary Vince Cable said will be combined “with a larger private contribution.”

The bank will be modelled on similar institutions already in existence abroad. It is thought that it could initially leverage a total of up to £10 billion to be lent to SMEs.

What does this mean for my business?

The government intends that the new bank will tangibly increase small firms’ access to capital. Previous government initiatives of this sort have been criticised for ignoring the requirements of the very smallest firms, but it is these businesses that the coalition now hopes to reach.

In the medium term, then, it is hoped that the small business bank will make it easier for you to access capital.

Unlike the current Big Four, the new bank will not have High Street branches. Instead, it is thought that it will make loans using existing infrastructure – including, interestingly, the peer-to-peer structures built by firms like Zopa and Funding Circle. In these cases it can be assumed that state-backed loans would be parcelled up with other, private sector money before being lent to businesses.

Loans made through peer-to-peer intermediaries can be particularly advantageous to small firms as they are often cheaper than those taken through the High Street.

What are the criticisms?

The government’s plans have not been universally welcomed. While it is generally accepted that lending must increase, and that a new, un-sullied institution with a clean balance sheet may be the best means by which this can be achieved, parts of the private sector are not entirely happy.

Some commentators have suggested that many businesses will be put off applying for funding because, at least initially, they will have to do so through existing lenders. Others have pointed out that the bank will not be open for business for almost two years – far too late for many of the firms that are struggling right now.

At the other end of the spectrum, some are unhappy about the idea of government-backed loans entering the market. The right-leaning Institute of Economic Affairs, for example, has expressed concern about the government taking on risk that commercial lenders are apparently unwilling to bear.

What are the alternatives?

Businesses across the country have an urgent need for affordable finance – not in two years, when the new bank is up and running, but today. Thankfully there are several alternatives available now.

The new bank will make use of peer-to-peer structures – but these structures are already open for business. You might consider approaching one of these intermediaries, many of which can offer cheaper loans than those found on the High Street, and with more flexible terms. Finally, you should also investigate factoring and invoice financing. These techniques allow you to borrow against the value of unpaid invoices, and are a popular means by which many firms finance their day-to-day operations.