The cure for all ills?

WHEN THE chancellor announced in his Autumn Statement a package of credit easing measures for smaller businesses, critics were quick to charge the Treasury with admitting defeat over the government’s Project Merlin credit agreement with the UK’s four major banks.

The banks signed up to making £190bn of credit available to businesses in 2011, up from £179bn lent in 2010. Of this, £76bn was earmarked for SMEs.

While they have largely met those commitments, the economic landscape has markedly deteriorated for the banks – evidenced in the wholesale markets where funding costs have risen.

Central to the government’s latest credit easing initiative – which is worth up to £40bn – is the new National Loan Guarantee Scheme (NLGS), which will make up £20bn of the overall package.

Also part of the initiative is the Seed Enterprise Investment Scheme (SEIS) – set to come in from April – which will offer income tax relief of 50% on investments of up to £100,000 in new start-up businesses, as well as a capital gains tax exemption on any asset disposals in 2012-13 that are subsequently reinvested in SEIS companies.

Under the NLGS meanwhile, banks will be able to apply for government guarantees within a two-year window for a fee. The guarantee can then be used to raise funds at a lower cost.

The Treasury claims the scheme will lead to a reduction in the cost of business loans of up to one percentage point. To qualify, companies must have an annual turnover of less than £50m.

But as David Birne, business recovery and insolvency partner at H W Fisher and Company puts it: “The banks will only lend when they’re prepared to lend. The economy will determine when the banks properly start lending again, not a government-backed scheme.”

Geoff Seymour, managing director of Derby-based telecommunications consultants Bluu Sky Connections, is equally dismissive.

“I’m not sure how any of the credit-easing proposals will have any measurable effect on our business,” he says. “The banks continue to be a lot more cautious but even if they weren’t, they now face a lot of apathy from customers, who are now looking to generate their own funding from private sources.”

Carl Benfield, managing director of renewable energy consultants Prescient Power, sees little evidence of credit-easing measures having an impact on small firms’ banking arrangements.

“We’ve had four different relationship managers in the last two years,” he says. “With increasingly less local representation, the reality is that banks don’t know who they’re doing business with. At best, the corporate managers are dislocated; at worst, they’re disinterested and dismissive.”

Looking ahead though, Benfield is slightly more optimistic.

“The £20bn credit easing accounts for less than 2% of total SME turnover which, in our sector, is insufficient to overcome most cash flow hurdles,” he says. “It also implies that traditional lending and the inherent increase in debt is a sensible avenue to pursue.

“However, the strategy is likely to percolate down and improve the lending situation, although how quickly and effectively remains to be seen.”

Blame game

Despite the ongoing blame game between businesses and the banks, companies still have the option of bypassing the banks altogether. The Funding Circle portal, founded in August 2010, is a prime example.

This allows savers to lend money directly to small businesses. Lenders can browse businesses the Funding Circle has underwritten and approved for lending. They then bid an amount and an interest rate – in auction style – to become part of the loan.

Each business loan request is made up of hundreds of lenders providing a fraction of the total loan, so lenders can spread their total funds across a number of businesses. Given the bidding process and the absence of any bank acting as a middleman, SMEs should, in theory, be able to achieve a more competitive deal.

Because lenders choose which businesses and at what rate they lend, returns will vary from person to person. Since the portal’s inception, lenders have typically received 8.3% before fees and taxes.

For businesses, monthly repayment loans from £5,000-£250,000, on one- or three-year terms, are available.

As of January 2012, investors had lent £21.3m to more than 500 businesses – the average loan amount being £39,332. The platform, meanwhile, was reporting a bad debt ratio of just 0.3%.

While the likes of Funding Circle will continue to attract interest from business, banks will retain their central role. Yet ongoing implementation of the Basel III Framework and its impact on banks having to buttress their capital reserves as the eurozone crisis plays out will determine just how keen they are to lend. ?