By Daniel Hunter
The new Bank of England Governor should make more use of his current powers to help small and medium sized businesses (SMEs), says Syscap, a leading independent finance provider.
1. The Bank of England should start using its powers under the ‘Quantitative Easing’ programme to directly lower the borrowing costs of SMEs.
The Bank of England can do this by purchasing leases and other bundles of asset backed loans from lenders. This would allow those lenders to provide new funding to SMEs. The effect would be to drive down the costs of funding for SMEs.
The Bank of England has made very little use of this tool and currently holds no such assets on its balance sheet, compared to the £375billion in gilts it holds on its balance sheet as a result of Quantitative Easing purchases.
2. The Governor should clarify for how long the Bank of England expects to hold interest rates steady.
Philip White, CEO of Syscap explains that SMEs would be more confident about investing and expanding their businesses if they knew for how long the Bank of England expects interest rates to be held down.
“There is too much speculation ahead of Monetary Policy Committee meetings over whether interest rates will rise or not. That uncertainty is damaging for businesses. The Bank of England could remove that uncertainty," he said.
3. Funding for Lending should include all bank lending to leasing companies
The Bank of England should open the Funding for Lending scheme to bank finance provided to businesses through independent leasing companies for “finance leases”. At present lending to SMEs via independent leasing companies is not eligible under the Funding for Lending scheme if it is a “finance lease”. This is despite finance leases being one of the most popular methods for SMEs to fund their investment in IT, plant and machinery. This makes this vital form of funding for smaller businesses unnecessarily expensive.
Recent research by Syscap showed that the interest rates on new bank loans under £1 million rose from an average of 3.76% in Q2 to 3.85% in Q3, suggesting that Funding for Lending, launched on August 1, has made little impact on the cost of borrowing for small businesses.
In contrast, average interest rates on loans over £20 million for large businesses did benefit, falling from 2.48% to 2.34% over the same period.
“The leasing sector is currently locked out of Funding for Lending, despite its track record of getting much-needed finance to the UK’s small businesses. Funding for Lending already needs a boost, and this would be an effective way of getting loans to those who need it most," adds White.
“It is widely accepted that economic recovery will not take hold until the SMEs recover so it would be great to see the new Bank of England Governor deliver more practical support to that vital part of the economy.”
4. Encourage the Treasury and BIS to have the new Small Business Bank use leasing companies as one of the conduits to lend to small businesses. Syscap argues that non-bank leasing companies already have a cost effective infrastructure in place to provide finance to SMEs.
“Leasing companies, like ourselves, are already supplying cost effective finance to thousands of small businesses that banks can’t or won’t fund. The new British Business Bank should use that system that is already in place and working," said White.
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