Following on from our recent article on the new Business Bank, this is the fourth in a series explaining the various government funding schemes available to businesses in the UK.
Funding for Lending Scheme (FLS)
What is it?
The Funding for Lending Scheme (FLS) allows banks and building societies to borrow at
cheaper rates from the Bank of England for periods of up to four years.
How does it work?
The Scheme was formally opened 1 August 2012.The aim of FLS is to boost consumer and business confidence and support demand for finance as well as reducing the cost of credit. The FLS creates strong incentives for banks to increase lending to UK households and businesses; and should act as a driver for competition among lenders, which should benefit both consumers and businesses. Some banks may offer specific business loans and mortgages linked to the FLS, whereas others may reduce interest rates or change the terms and conditions on existing products.
Who delivers the scheme?
The FLS is jointly overseen by the Bank of England and HM Treasury and banks deliver
directly to customers.
Extension of scheme April 2013
The Treasury made the following announcement on 24th April 2013:
“The Bank of England and HM Treasury are today announcing an extension to the Funding for Lending Scheme (FLS). This extension builds on the success of the FLS so far, and has three main objectives: to give banks and building societies confidence that funding for lending to the UK real economy will be available on reasonable terms until January 2015; to increase the incentive for banks to lend to small and medium-sized enterprises (SMEs) both this year and next; and to include lending involving certain non-bank providers of credit, which play an important role in providing finance to the real economy.
Since its introduction in August last year, the FLS has contributed to a sharp reduction in funding costs for banks and building societies. That has led to a reduction in borrowing costs and an increase in credit availability for UK businesses and households. This is feeding through to more lending than there would have been in the absence of the scheme. But the improvement in credit conditions since summer 2012 has been less marked for small and medium sized enterprises (SMEs) than for larger businesses and households.
Three specific changes to the FLS are being announced today.
First, the scheme will be extended for one year, meaning that drawings will be permitted until the end of January 2015. Second, as part of the extension, the incentives to boost net lending will be heavily skewed towards SMEs. New allowances for drawings in the extension period will be calculated on the basis of banks’ lending behaviour. For every £1 of net lending to SMEs in 2014, banks will be able to draw £5 from the scheme in the extension period.
And to encourage banks to lend to SMEs sooner rather than later, every £1 of net lending to SMEs during the remainder of 2013 will be worth £10 of initial borrowing allowance in 2014. Net lending to other sectors during the remainder of 2013 will count towards the initial borrowing allowance for 2014 pound for pound. The sectoral split of lending will be published for each participating group alongside related FLS usage during 2014.
Third, the FLS will be expanded to count lending by banking groups involving financial leasing corporations and factoring corporations, which can be important sources of finance to some SMEs, and certain mortgage and housing credit corporations. All participating banks and building societies will be required to report net lending related to these non-bank credit providers for the purpose of calculating their borrowing allowances during the extension period. In addition, banks and building societies will have the option of reporting this lending for the purpose of calculating their borrowing allowance for the remainder of 2013.
The fee structure and operation of the scheme will be unchanged during the extension period, other than as outlined above. There will continue to be no upper limit on, or target size for, either individual or aggregate borrowing under the FLS. The extent to which banks and building societies choose to borrow more from the FLS will depend in part on their alternative funding costs, which have fallen sharply since the FLS was introduced. But the changes announced today provide banks and building societies with the assurance that they will be able to continue to fund lending to the real economy at reasonable cost, even if funding pressures rise again.
Although the Bank is not indemnified for the operation of the FLS, the exchange of letters published today between the Governor of the Bank of England and the Chancellor of the Exchequer shows that the Bank has sought and received an assurance from the Government that the objectives of the extended FLS remain within the Bank’s remit. The scheme will continue to be overseen by a Joint Operating Board comprised of Treasury and Bank officials.”
Positive effects?
Bank officials have said that the FLS would take time to work its way through to small businesses, but the March data provided evidence that it is finally having some effect. As well as experiencing the first rise in lending in 18 months, small businesses saw their borrowing costs fall.
The average interest rate on new business loans of up to £1m – a proxy for smaller company lending – dropped to 3.75pc from 3.85pc in February.
Negative effects?
As per this article in April 2013 there is a possibility that the FLS has made residential mortgages more easily available and driven rates lower! When used in conjunction with the governments Help to Buy scheme, could this be the catalyst for another property boom? We all know what that led to…
Finding alternative funding
If the continuing lack of availability of funding is affecting your business, please contact us. We are specialists in this field and can help to point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: Images Money