Further thoughts on FLS

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Should FLS be put on steroids? Will it ever make a difference to SME lending? Just a couple of lending related questions in the press this morning.

A few thoughts from a business perspective. The latest survey data available on SME attitudes to finance - the BDRC SME Finance Monitor - showed last week that across SMEs (excluding those that are 'permanent non-borrowers') schemes that aim to reduce the cost of finance, such as FLS, do indeed increase companies' appetite for borrowing. So while weak trading conditions and uncertainty clearly continue to impact on SME's investment plans and external finance needs, for some at least, if you change one of the supply conditions - in this case the price of finance - demand will increase.

As we wrote about last week, large numbers of SMEs would borrow but for some factor holding them back – that factor is very often discouragement (whether directly or indirectly) from finance providers or concerns about the costs and T&Cs on lending. FLS can help with some of these factors. Six months in, if there are lessons to be learnt about making the scheme more effective, for example to a wider range of finance providers, to have more transparency about the split between mortgages and business lending or to put a lot more oomph into promoting to businesses, then let's do it.

But this is only temporary (whether extended at Budget or not) and doesn't fix the strained relationships between banks and businesses. Fundamentally our view is that the SME banking sector is simply not competitive enough - we need more dynamism and choice in the market for small companies.

Government also needs to take a hard look at the state of competition by immediately launching a review of further actions it could take to increase switching and bring forward new challengers. And it should also think hard about how to focus its proposed Business Bank on the key issue of competition in SME banking.

Any measures brought forward at Budget on SME finance need to both improve FLS and get cracking on competition.

For more info see our Budget submission and our report on Finance for Growth


Chief Economist

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