Osborne targets small firms with £1bn scheme extension

The Treasury is set to extend the Funding for Lending scheme for another year, in an attempt to boost the credit supply to small and medium-sized businesses, in a move some predict will see another £1bn made available to smaller businesses struggling to find financing.

The scheme was launched in mid-2012, helping to improve credit conditions for households and businesses, with the incentives re-focussed towards business lending in November 2013.

The move should provide lenders with continued certainty over the availability of cheap funding to support lending to small and medium-sized enterprises during 2015, “even in the event of stress” in bank funding markets.

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The drawdown window will remain open until 29 January 2016 and current participants will remain part of the scheme unless they choose to opt out, retaining borrowing allowances earned by lending from the second quarter of 2013 to the fourth quarter of 2014.

Participants will be able to earn further allowances by lending to SMEs in 2015, with such lending strongly incentivised by allowing lenders to draw £5 in the scheme for every £1 of net lending to SMEs.

All other terms of the scheme extension remain unchanged, with drawings continuing to be for a term of four years and attracting a fee of 25 basis points.

An exchange of letters between the governor of the Bank of England and the chancellor showed that the bank sought and received an assurance from the government that the objectives of the extended scheme remained within its remit.

The Monetary Policy Committee judged there will be no material impact on the stance of monetary policy, while the Financial Policy Committee welcomed the changes.

Mark Carney, the BOE’s governor, stated that the scheme is not permanent so, as access to credit has returned to the mortgage market and large corporations, it has been tapered appropriately.

“The extension announced today concentrates the FLS on the one area where support remains warranted: the supply of credit to SMEs,” he added.

Chancellor George Osborne said: “Now that credit conditions for households and large businesses have improved, it is right that we focus the scheme’s firepower on small businesses, which are the lifeblood of our economy.

“That’s also why we’ve reformed the banks, introduced the British Business Bank and are now focussing the Funding for Lending scheme on supporting them.”