SMEs rely on securing sufficient funds to start and expand their businesses, but unfortunately that level of funding is increasingly difficult to come by. The Funding for Lending Scheme (FLS), which was introduced in July 2012, was supposed to help the issue by offering banks cheap loans on the provision that they then lent it out to households and businesses, but official figures show it hasn't had the desired impact.
Although the scheme has been successful on the residential side of things, SMEs have yet to feel the full benefit. Latest figures from the Bank of England (BoE) show that banks increased their net lending by £10 billion in the 18 months since the scheme was started – leading the BoE to declare that "the FLS has been successful in meeting its initial objective, to provide incentives to banks and building societies to boost their lending to the UK real economy" – but further analysis reveals that net lending to small businesses actually fell by £1.3 billion between April and December last year.
The reforms which were intended to incentivise small business lending have clearly not had the desired effect, which perhaps accounts for the reason that the BoE has now amended the FLS to stipulate that banks will only have access to cheap funds if they lend it out to businesses – not households. The FLS has already helped the economic recovery by encouraging residential lending, leading to a surge in mortgage activity, but the new focus on corporate lending should hopefully revitalise the SME sector too.
It's a change that can't come soon enough for SMEs, many of which could still be waiting in the wings to benefit from the economic recovery. The likes of commercial mortgages will be key to the success of a lot of small firms, while other forms of business lending can provide a vital lifeline to help them expand further. With the FLS now only being open to business lending there's hope it could soon have the desired impact, although critics argue it's taken the Government far too long to act in the interests of SMEs.
There have been additional calls for the Government to amend business rates to help smaller companies even further, as currently those additional taxes can prove fatal to a lot of fledgling companies. A report from the Business, Innovation and Skills Committee has said that the current system of property tax is no longer fit for purpose, as the cost of business rates is increasing disproportionately to rental costs – leaving a lot of businesses, particularly retailers and SMEs, in financial difficulty.
Various reforms have been suggested to help matters, including early revaluation to ensure that the tax paid is based on up-to-date property values, but there are also calls for a complete wholesale review and a suggestion that the amount of tax should be based on the value of sales rather than property price – potentially meaning much lower rates for smaller companies.
The report echoes the views of leading business figures and has been largely welcomed by industry bodies, with the combination of increased business lending and reduced business rates potentially providing the foundation a lot of smaller firms need to get off the ground.
However, until these changes have been fully implemented, it's even more important for small businesses to get access to suitable finance.
Check out our pick of business loans, commercial mortgages and bridging finance to see if you can get the funding you need to take your business further.
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