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Changes to FLS won't solve SME loan crisis

Jun 10, 2013 Simon Williams

The Bank of England has invested billions in its Funding for Lending Scheme (FLS), launched last summer, so it isn't too surprising Business Secretary Vince Cable didn't want to throw in the towel on the initiative just yet.

Despite almost no positive statistics to speak of, particularly with regard to available short term lending for small and medium-sized enterprises, the Bank announced recently that it was revamping the FLS and extending it until January 2015.

"More credit for small businesses is essential to building a stronger economy," Cable said, according to The Guardian. "Alongside the business bank that I am setting up, the funding for lending scheme is a targeted intervention to help deal with this problem. It is right that it is skewed towards the SME sector, which has suffered the most from the credit crunch."

The FLS' changes are geared specifically to spur funding to SMEs, as banks will receive £5 for every £1 they loan to smaller companies. But will that be enough to finally kick-start a sector that's been scuffling along since the recession?

According to a recent blog post by The Guardian, the answer is a resounding no. As the source noted, the issue revolves around what financial institutions consider to be "risky investments." After the Great Recession began, banks stopped lending to any company that it didn't consider to be "safe" - primarily smaller firms, which tended to be at or near the subprime credit level. Instead, financial firms have reallocated this funding to larger companies and other safer investments, "while SME borrowing has shrunk 3 percent year on year."

If banks aren't going to turn the SME sector around, another method will have to fill in the lending gap. Many smaller companies have already turned to alternative lenders for help.

Some of these companies use different scoring measures, such as Payment Reporting Builds Credit, which looks at financial factors like past utilities payments. This has allowed a larger percentage of SMEs to receive funding.