Funding for Lending Scheme Live Today

The Funding for Lending Scheme, a Bank of England and HM Treasury joint venture, "went live" today. The scheme sees financial institutions borrow money at below-market rates with the interest rates being reduced the more each institutional lends.

FLS is expected to make mortgages cheaper for home-buyers but Royal Bank of Scotland (RBS) has already said it will use the scheme to cut the cost of borrowing for small businesses. RBS believes new deals to small firms under FLS will save UK SMEs up to £40 million in interest as the banking group will cut interest rates by between 1% and 1.6%

In its explanatory note with the announcement of the scheme a couple of weeks ago, the Bank of England stated weakness in the UK economy and debt in the Eurozone as two major factors in the background. UK banks, building reserves of capital and being more risk-averse after the economic crisis, was another issue and FLS aims to release more funds to the real economy.

The scheme opened today to mixed responses with the British Bankers Association fully supporting the move:

“Now is a very good time for UK businesses and individuals to speak to a bank about their financing needs. The scheme is open to all banks and building societies and should act as a driver for competition, which should benefit both consumers and businesses.”

The Federation of Small Businesses (FSB) was more guarded, with its national chairman, John Walker, saying success would be judged in time:

“The main objective for any government-backed scheme should be to ensure that the finance actually gets through to small firms. Four in ten (40% of) small firms were refused bank credit in the second quarter and this needs to change if the economy is to grow.”

Graeme Leach, the Chief Economist at the Institute of Directors (IoD) was a little more blunt, saying that

“There’s one snag. Improving the supply of loans matters little if companies and consumers don’t have the confidence to borrow.”

Clive Lewis, Head of Enterprise at the ICAEW was event more damning, adding:

“Business confidence is weak. The new Funding for Lending scheme only creates more confusion. There are already a number of existing schemes that the government has to offer. With the new scheme it is worth noting that it is entirely the banks decision as to if a business is eligible. FLS offers the possibility of cheaper finance but supply will still be an issue especially for start-ups with poor credit records.”

“Given companies current wariness of the various banks and lending, we would encourage businesses to look at all the alternative sources of finance in addition to bank finance.”

The Funding for Lending Scheme, valued at approximately £80 billion, supercedes George Osborne’s previous £20 billion National Loan Guarantee Scheme which was part of Project Merlin.

Businesses looking for alternative funding should take a look at Paul Green’s business advice article Sources of Funding.

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