It may feel like a fairy tale. The Bank of England has cut interest rates to 0.25%, but if you are an owner of a small business it might feel as if it would be easier to ask Father Christmas for a loan than borrow from a bank at an interest rate anywhere near that level.
For that matter, it may feel as if the tooth fairy is a better bet for any kind of loan for your business than the bank.
But that may change, thanks to the Bank of England’s new Term Funding Facility announced this week.
The facility was announced as a part of a package of changes revealed by the Bank of England’s Monetary Policy Committee (MPC), which also included cutting interest rates, and announcing more quantitative easing.
The idea is for the Bank of England to provide funding to banks and building societies such that they can borrow from the central bank at just 0.25%, on the condition that they then lend the money on. This represents a major evolutionary step from the Bank of England’s funding for lending scheme, as under this new innovation, banks will be provided with additional funding, and given a financial incentive to be quite bold in their lending.
That does not mean, of course, that if you are seeking to borrow money from your bank that you will be able to borrow at 0.25%, after all, a bank has to make a markup. But competition between banks should weigh down on their margins.
Bank and building societies will be eligible to apply for up to 5% of their base stock from this scheme. They will be able to borrow from the Bank of England at 0.25%, plus a fee, but the fee will be zero if their net lending rises.
The minutes from the MPC also said that “Banks would be able to access another pound of funding for every pound their net lending expanded.”
So what difference will it make? “CBI Chief Economist, Rain Newton-Smith said that the Bank of England’s recent announcements “should be a shot-in-the-arm for business and consumer confidence, lowering borrowing costs and keeping liquidity flowing through the economy.”
Not all agree.
James Sproule, Economist at the Institute of Directors, said: "The cost of capital is not the major factor for business at the moment, with a survey of IoD members showing this week that six in ten think this interest rate cut will not have a discernible effect on their performance." He added: "The Bank cannot do the heavy-lifting on boosting business confidence, the Government has to play its part. The real test of confidence is going to be the Autumn Statement, which could be usefully brought forward several weeks. We would like to see moves to raise the Annual Investment Allowance to half a million pounds, which would encourage business to buy productivity-raising new machinery. Delaying the introduction of the badly-designed Apprenticeship Levy would also remove one short-term regulatory headache for firms.”
Business owners may feel cynical, after all, government schemes to kick-start lending have not been so successful in the past. And in any case, much of the funding will find its way into mortgages and personal lending rather than into businesses. But the Term Funding Scheme is genuinely innovative and for banks that fully participate, the financial rewards are such that they may find it quite lucrative.
This may indeed be good news for business owners, and should additionally provide competition against peer to peer lending schemes, which many business owners have been choosing over bank finance.
See also: Businesses react to 0.25% interest rates