Government scheme fails to boost business loans

Lending by UK banks is falling despite the Government trying to reverse the trend.

New lending by UK banks fell by £300 million in the first quarter of 2013, signalling a failure of the Funding for Lending Scheme (FLS), which was created by the Government to try to spur lending to businesses and individuals.

This is the second consecutive quarter lending has fallen despite an extra £2.6 billion being handed out to the banks in the same period.

Businesses have been mainly affected by the fall, as data from the Bank of England shows that lending to individuals has increased.

But the Bank said lending will improve later in the year when credit conditions are more positive.

Business lending

In the first quarter of 2013 the banks borrowed an extra £2.6 billion, pushing the total value borrowed to £16.5 billion since the scheme started last summer.  However, instead of passing this money onto customers, the amount given out by the banks contracted by £300 million in the same period.

While lending to individuals has increased, business lending is down. One reason for this is because the three main lenders – RBS, Lloyds and Santander - have scaled back on the amount they’ve given out recently because of the financial crisis.  

Another reason given for the decline in business lending is that lenders have reduced their exposure to commercial property.

Funding for Lending

There are now 40 banks signed up to the scheme, including all the main high street banks, apart from HSBC, and it covers 80% of UK lending.

It was set up last summer with the aim of providing cheap loans to banks so they could in turn lower costs for customers. During this time savings rates have plummeted but mortgage rates have also dropped giving homeowners some breathing space.

A total of £70 billion is expected to be made available through the scheme which was recently extended until at least January 2015.

Alternative business loans

As the banks reign in their lending, smaller lenders, such as Funding Circle, are gaining customers.

Funding Circle is a peer-to-peer lender, meaning that people like you and me can lend our cash directly to businesses. As a result we pocket a far better rate of return than if we put our cash in a simple savings account.

Last week £3 million was borrowed by businesses  through Funding Circle, which is the best week on record. It said the biggest difference it’s seen since the introduction of FLS is that businesses are put off taking out loans from the banks because it takes so long.

Andrew Mullinger, co-founder of Funding Circle, said applications were up by 25% in the last quarter and more than half of its borrowers had tried to secure loan at a bank first and failed.

"Connecting individual investors directly with business owners cuts out the middleman, allowing businesses to access finance quickly when they need it most. Unlike the banks Funding Circle will decide whether a business is eligible for a loan through the site within 48hours, and deliver the loan within a week of that decision,” he said.

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