Autumn Statement: Chancellor to extend Funding for Lending scheme to help small firms

The Government’s Funding for Lending scheme, designed to help small businesses access bank credit, is to be extended for a further year, the Bank of England and the Treasury has said.

In his Autumn Statement, George Osborne will also announce further financial assistance for the small business sector, whose outstanding loans from banks have continued to shrink despite the recovery.

Last year the Bank of England and the Treasury switched the focus of the FLS from incentivising mortgage lending to increasing small business credit, but net credit to firms has continued to fall over the past 12 months according to the latest official figures. The FLS, which was established at the height of the eurozone crisis in July 2012, was originally due to be wound up in January 2015.

The Treasury said the extension would provide small firms with “continued certainty” over the availability of cheap funding in 2015.

The Chancellor is also expected to announce an extra £400m to extend Enterprise Capital Funds, a state venture capital programme. There were will also be further resources for the Enterprise Finance Guarantee scheme, enabling it to guarantee a further £500m of new lending. Both subsidy programmes are administered by the British Business Bank, established by the Business Secretary, Vince Cable, in 2012.

“This is another big step forward, with significant extra funding that shows our new bank is delivering the finance small businesses need to grow and create jobs,” Mr Cable said.

The FLS enables commercial banks to obtain cheap funding from the Bank of England provided they pass it on to corporate borrowers, with larger incentives for lending to small firms.

But the most recent data from the Bank of England on the usage of the scheme for the third quarter of the year showed that although banks drew down £1.9bn in cheap funding, they contracted their total lending to small firms by £128m. Similar contractions took place in the first two quarters of the year.

However, officials at the Bank of England point out that the aggregate net lending figures have been pulled down by reduced lending to small property development companies and deleveraging by the majority state-owned Royal Bank of Scotland. The decline in net lending in the most recent quarter was also lower than the average for the second half of 2013.

Under the FLS banks can draw £5 of cheap funding for every £1 in net lending they make to small and medium-size firms. The British Business Bank does not provide funding directly to firms, but provides guarantees and channels subsidies to borrowers.