Funding for Lending scheme “remains disappointing” as lending figures continue to drop

Lending to small and medium-sized firms through the government’s Funding for Lending (FLS) scheme continued to fall across the second quarter of 2014, according to figures released by the Bank of England.

According to the latest statistics, net lending to small and medium-sized businesses under the scheme dropped by a further £435m in the second quarter of 2014, highlighting the scheme’s continued struggles in releasing much-needed finance to small firms.

Launched in August 2012 by the Bank of England and HM Treasury, the Funding for Lending scheme was intended to encourage lending to small businesses by providing cheap loans to banks, which they in turn can use to increase the number of loans and mortgages they offer to businesses and individuals.

The continued drop in loans showed the scheme is still struggling to get off the ground, despite a rule change relating to liquidity requirements announced in September 2013 which was supposed to encourage £90bn of additional lending.

However, the drop in lending to small and medium-sized firms was not as dramatic as the £723m fall in the first quarter of 2014, suggesting an improvement in prospects may be on the horizon.

Additionally, outside the ambit of FLS, lending to non-financial businesses did rise slightly, the first such increase since 2009.

Business leaders across the political spectrum expressed disappointment at the news and claimed more needed to be done by the government to ensure the success of the scheme.

Phil Orford, chief executive of the Forum of Private Business, commented: “The Funding for Lending Scheme shows another net reduction of funds reaching small businesses.

“These figures would surely be worse still if Funding for Lending was not in place, and it is true there is a weakness in demand, but it remains disappointing to see less money being lent in this crucial part of the economy. Without more lending to small businesses their growth and the country’s growth will remain slow. Politicians of all parties need to have a hard look at the lending sector ahead of their conferences in September and October.

“Our members believe that measures to support better and wider bank lending to the small business sector is a crucial component of any prospective government’s manifesto.”

Nicola Horlick, CEO of alternative finance platform Money&Co, said: “Today’s figures show that UK SMEs are still starved of the finance they need. Despite efforts to boost business lending through the Funding for Lending scheme, these latest figures reveal that the banks are still not doing enough to give SMEs adequate funding.

“Access to finance is the basic test of our economy’s ability to support growth. However, the traditional financial establishment continues to deprive SMEs of the funding they need, and UK businesses continue to struggle.

“Alternative finance, such as person-to-business lending, not only supports UK businesses, but also gives UK savers a new way to make their money grow.

“The Government’s decision to open a consultation into new lending routes for SMEs will help boost awareness and understanding, but more needs to be done to open up avenues for growth.”

Anil Kapoor, a director at accountancy firm BDO, commented: “Today’s Funding For Lending figures show that while the government initiative is well meaning, the big participants in the banking industry are not fulfilling market requirements.

“There is clearly more demand from businesses than is being serviced and this is where the alternative lending market is cementing its place as a legitimate solution to the liquidity shortage. However, these lenders must look to the future to ensure their own sustainability in an increasingly volatile environment.”