By Daniel Hunter

Improved access to more varied sources of finance would help small and medium-sized enterprises (SMEs) and the wider economy, but barriers to increasing non-bank lending also need to be tackled, the Confederation of British Industry (CBI) said today (Wednesday).

In its submission to the review led by Tim Breedon into alternative sources of debt, the UK’s leading business group suggests ways to boost the supply of non-bank finance, as well as solutions to the current lack of demand.

Although businesses are understandably more risk-averse because of the fragile state of the economy, making sure firms have greater access to alternative sources of finance will be vital when it comes to securing growth and supporting the recovery.

“For too long, the UK’s small and medium-sized companies have relied heavily on banks for most of their credit. If we do not act quickly to increase the range of available finance, other countries will steal a march on the UK," John Cridland, CBI Director-General, said.

“While banks will remain an important part of the funding landscape, growing firms also need ‘patient’ capital, with a longer investment return horizon. To deliver this, we need to give our firms access to new sources of funding, such as by opening UK bond markets to medium-sized businesses. The Government’s £1 billion of Business Finance Partnerships will also help stimulate investment in these companies.

“This is as much a problem of demand as supply. Firms need independent help and support to locate the finance that’s right for them. So we must cut through the red tape and complexity surrounding non-bank finance to make it more easily understood by small and mid-sized businesses, which often lack the resources of a larger company. We also need to make it simpler for alternative lenders to judge the credit worthiness of SMEs.”

To increase the amount of funding available for medium-sized businesses, the CBI recommends that the Government establishes a mid-sized bond market in the UK, using a mix of new infrastructure and tax incentives. Retail interest can then be stimulated in mid-sized businesses’ bonds through new tax-free savings in an ISA.

Short-term tax incentives, similar to Venture Capital Trusts, could be used to encourage investment in the new bonds, as well as exempting certain investments from tax.

Combatting a lack of awareness among SMEs about sources of non-bank finance will be vital to help stimulate demand, according to the CBI.

It proposes the existing programme of Independent Financial Advisers (IFAs), which serves consumers, is expanded to meet the needs of SMEs. It also calls on the Government to work with the financial services sector to help make non-bank finance, such as bonds and private placements, much less complex and bureaucratic.

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