The Debt Connection – December 2013

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In the latest Debt Advisory newsletter from Clearwater Corporate Finance, we look at the recently announced changes to the Funding for Lending Scheme (FLS) and British Business Bank.

Funding for Lending Scheme

Last Thursday, the Bank of England announced a change to the FLS from January 2014 to refocus on businesses and away from mortgage borrowers. The Bank’s Governor, Mark Carney, said supporting mortgage lending was “no longer necessary” and that an overheated housing market would be a risk to the economy.

The scheme has already had a significant impact of reducing bank funding costs, which has fed through to the price of household credit. The FLS was launched in July 2012 and in the first 14 months saw 42 banks and building societies borrow £23.1bn from the Bank of England at rates as low as 0.75%. Third quarter drawings in 2013 increased to £5.8bn, up from £1.6bn in the second quarter. This increased lending has been skewed towards mortgages and household borrowings though, as business lending has continued to contract. The changes announced are designed to underpin the supply of credit to small businesses over the next year.

Currently, each bank’s allocation of “cheap funding” from the Bank of England is assessed on the quantity of loans they make to households and businesses. Going forward, the assessment will only be based upon the volume of loans made to businesses. Secondly, the rate at which banks can borrow from the Bank of England will be fixed at only 0.25% above the Bank Base Rate (0.75% in total), which is the cheapest rate currently available. At present, this lowest rate is only available to banks that increase their net lending.

The strategy behind these changes is to take some of the heat away from the mortgage market ahead of any bubble arising and ensure that recent economic growth is built on more sustainable business investment and export foundations, rather than household spending and rising house prices.

Clearwater’s heads of Debt Advisory comment on what this means for businesses looking to raise finance from banks.

Chris Smith comments: “We expect the changes to the FLS to have a positive influence on borrowing costs for businesses. However we anticipate the disparity between large corporates versus mid-market & small businesses to continue, with large corporates able to raise large sums of money from banks at comparatively cheap pricing.”

Mark Taylor adds: “Due to the risk profiles of large corporates, banks find it relatively cheap and economical to lend quite large sums to them. We are supportive of the Bank of England’s refocus of the FLS, but believe it should be targeted more specifically on those businesses who have found it harder to raise financing from traditional bank sources. The intention behind the FLS is absolutely correct, however the implementation clearly required fine tuning. Hopefully this will go some way to addressing this.”

British Business Bank

The government also announced this week an additional £250m to be put into the British Business Bank, to help SMEs.

This £250m is in addition to the £1bn announced last year to allow greater funds for investment and taking on more staff. The British Business Bank is backed by government guarantees and is currently being set up by the Department for Business, Innovation and Skills in Sheffield and is tasked with generating more than £500m in new lending and investment for smaller businesses within the UK.

The FLS has undoubtedly had a positive effect on the UK economy since its launch in 2012. Now, with the refocus on purely supporting business lending by the banks, we are hopeful of credit easing to smaller businesses, as well as larger corporates.

If you would like to discuss any of the subjects covered in more detail, then please get in touch with us using the links below. 

Chris Smith – Partner

Mark Taylor – Partner

David Burton – Manager