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£80bn scheme launched to encourage banks to lend to small businesses

Banks are offered an incentive to issue new loans

The Funding for Lending Scheme (FLS), which aims to increase lending to small and medium-sized businesses, is now in operation.

Launched by the bank of England and HM Treasury, the new initiative allows banks to borrow directly from the Bank of England at below market rates.

To incentivise banks to use the money to loan to businesses and homeowners, for every £1 lent out, banks will be able to access an extra £1 reduced-rate loan through the scheme.

Introduced during the UK’s longest double-dip recession in over 50 years, FLS will ultimately replace the National Loan Guarantee Scheme, which was launched in March.

Chancellor of the Exchequer, George Osborne is confident that the new scheme will help to kickstart bank lending. He said, “The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm.”

However Brendan Flattery, CEO of Sage, UK and Ireland, feels that attitudes to borrowing need to change before the new scheme can help start-ups.

He said, “The Funding for Lending Scheme should make it easier and cheaper for banks to lend, but they also need to work closer with small businesses in order to take more calculated risks and provide access to finance at competitive rates.

“It will take time for perceptions to shift around the challenge of securing loans, and will only really change when business people see these Government schemes delivering. Until that happens there will be a lot of budding entrepreneurs who aren’t prepared to make the leap.”

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