The first steps in creating a £1 billion government-backed Business Bank designed to expand lending to smaller firms starved of funding from Britain’s main lenders, was announced last week.

This is welcome news for SMEs who have struggled to access finance over the past few years. However, the new Business Bank will take 18 months to set up, so what about the SMEs struggling to obtain finance today? Will they become part of a lost generation? 

Jason McGee-Abe spoke to a few industry figures to find out what they think of the announcement and how SMEs can be supported with alternative finance…

Speaking at the Liberal Democrats conference last week, Business Secretary Vince Cable announced: “I’m working with the Chancellor to develop a new institution that will combine a billion pounds of new government capital with a larger private sector contribution and this will apply leverage to guarantees to support up to £10 billion of finance to small and mid-sized companies.”

Philip George, Interim CEO of Shawbrook Bank, believes the announcement is a very positive step by the government in its efforts to support small businesses and increase growth. 

He said: “With every week that goes by, the number of credit-worthy businesses struggling to borrow from high street banks increases. Many thousands of SMEs in this country are being stifled by the lack of credit, and we hope the new business bank will help increase lending so these businesses can once again expand and grow. 

“Banks are being criticised for not lending to small businesses, but let’s not forget there are challenger banks like Shawbrook who are already working very hard to plug the gap left by the high street banks.

“We look forward to hearing more details of the government’s business bank in the Chancellor’s autumn statement, and hope to play our part in the scheme. In the meantime, we will continue to fulfil the promise we made when we launched last year and provide no-nonsense lending to hard-working businesses and individuals around the country.”

The Business Bank is being set up to address the long-standing, structural gaps in the supply of finance, identified in Tim Breedon’s report on non-bank finance. The bank is to be professionally run at arm’s length from government and it will be commercially focused. The Bank will be leveraging what alternative lenders are already currently doing, and private commercial lenders will be responsible for assessing the risk of its deals.

Laura McMullen, Business Development Manager at Funding Circle, commented: “Last week’s news is quite opaque, and many small businesses will be unsure how they will benefit from a business bank. We’re glad that the critical importance of increasing the flow of finance to small business is being recognised. 

“However, there are thousands of businesses that desperately need access to finance today, not in 18 months’ time. If these businesses are not supported now, they risk becoming a lost generation unable to reach their potential. Any Business Bank needs to confront the on-going problems applying for a bank loan presents to a small business, the obstacles and red-tape involved in loan applications need to be removed, and greater transparency provided around costs.”

According to recent Experian research, many SMEs are unaware of alternative financing options currently available, with most continuing to rely on traditional bank overdrafts or personal sources of cash for additional funding. When the 300 SMEs polled were asked to name their primary source of additional funding currently used, the top answer, with 20 per cent, was delaying payments to their suppliers.

Adam Tyler, Chief Executive of the National Association of Commercial Finance Brokers (NACFB), welcomed the announcement and told B&C that the Association has been speaking with Vince Cable’s office about business funding for over 12 months. 

He said: “The issue concerning the current lack of funding for businesses is an extremely important one, which has been raised for quite some time now. Ever since I explained what the NACFB stood for at a press launch event for the Breedon Report, Vince Cable’s office has encouraged us to work together with the SME trade bodies and accountancy organisations. In addition, we have worked tirelessly with lobbying, and membership-wise, to raise the awareness of the financial options available through alternative funders.

“We understand the frustrations businesses go through in searching for alternative funding and the finance gap for SMEs over the next five years has been pointed out. This is why the recent Business Bank announcement is a welcome one despite the fuller details of its launch in 18 months not being disclosed. 

“However, I must point out to all SMEs that need to feel confident when they are considering borrowing. The NACFB has been helping SMEs for 20 years on a national basis to fill any voids left in funding. Our latest member survey highlighted that our lending to SMEs has actually increased for the third straight year, with a 100 per cent increase in asset and equipment finance for example.

“We have recently partnered with the Federation of Small Businesses (FSB) to supply commercial financial solutions to all the businesses under its umbrella. This equates to more than 200,000 businesses that are able to access finance via our lender members of the Association.”

Five years on from the start of the credit crunch, we’ve often heard how good companies are still struggling to secure funding from high street banks. Last week’s announcement is a welcome one in terms of recognising the lack of liquidity for businesses, but the downside is the 18 months interim period, and the potentially lost generation of SMEs who need access to finance today.