Running a small business requires one thing above all others if it's going to be successful – funding. Banks tend to be the go-to place to secure that level of funding, and it had been hoped that the Government's Funding for Lending Scheme (FLS) would have encouraged providers to offer the necessary finance. Unfortunately, that doesn't seem to be the case, because lending to businesses through the scheme is actually falling.
According to official figures released yesterday, lending to small and medium-sized enterprises (SMEs) through the scheme fell by £435m in the second quarter of the year. It isn't as much of a contraction as in the first quarter – in Q1 2014, lending to SMEs dropped by £723m – but it's still a significant shortfall, and it's led analysts to argue that the scheme's overall purpose hasn't been achieved.
That purpose was to stimulate funding to businesses, which has been seriously lacking since the financial crisis hit. It was hoped that lending activity would have really started to ramp up when the FLS was restricted to business lending, with no lending to the residential sector, at the start of the year, but as the figures show, this hasn't yet happened.
In fact, including larger corporations as well as SMEs, total net lending to businesses fell by £3.9bn in the second quarter of 2014. Commenting on the figures, John Longworth, director general of the British Chambers of Commerce, said:
"Although the decline in lending to SMEs was less than in the previous quarter, Funding for Lending continues to disappoint. Despite the welcome re-focus towards SME lending, the real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses.
"Unfortunately, many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential. These figures reiterate that much more needs to be done to fill major gaps in the provision of SME finance in the UK."
It isn't just small businesses that have been suffering, either. They may not be benefitting from additional funding, but there's one sector of the financial market that's been actively losing out since the introduction of the FLS – savings.
Savings rates have fallen considerably in the two years since the FLS was introduced. Moneyfacts' figures show that, in August 2012, just before the FLS was introduced, the average long-term fixed rate was 3.37%, while today it's just 2.03%. Long-term fixed ISAs have suffered a similar fate, falling from 3.30% to 2.00% in the same period.
But why has this happened? Well, quite simply, providers no longer need our cash in order to provide loans to companies, because they can draw the funding they need from the scheme instead. Because they don't need to compete they've reduced rates accordingly, and this – combined with additional factors such as historically low base rate – has served to push savings rates to record lows.
Industry analysts are just as disparaging of the whole thing. Laith Khalaf, senior analyst at Hargreaves Lansdown, commented on the latest update:
"The jury is still out on the Funding for Lending Scheme and [yesterday's] figures don't increase the chances of a positive verdict. The Bank of England will maintain that the scheme will take some time to have full effect, but in the meantime savers are bearing the brunt of the pain in their deposit accounts and cash ISAs."
Despite the FLS being full of good intentions, it doesn't seem to have had the desired effect. It did help to revive the housing market when it was permitted for use in the residential sector, but the side-effects haven't been quite so welcome for savers or businesses, many of whom are still failing to benefit.
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