Bank lending to businesses has shrunk by 17% over the past four years, in the months to May lending collapsed by £3 billion. Experts and politicians alike acknowledge that SMEs are the key to economic growth, they account for nearly half the UK’s GDP and employs 60% of its workforce.
This article will look at a number of schemes, that the Government has introduced to encourage business finance. They are the Funding for Lending Scheme (FLS), Enterprise Investment Scheme (EIS), Export Enterprise Finance Guarantee Scheme (ExEFG) and the Seed Enterprise Investment Scheme (SEIS).
Enterprise Investment Scheme
The EIS was designed to help smaller high-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. For example an individual with no more than a 30% interest in the company can reduce his income tax liability by an amount equal to 30% of the share subscription. Be wary though, the rules for qualifying are complicated. For example the company must not have assets greater than £7 million and all capital employed must be actively engaged in the company for 24 months. EISs aren’t traded on an exchange, they can be illiquid, and the scheme can also be quite inflexible, as shares must be held for a minimum of 3 years to benefit from tax relief. Capital is only returned when the underlying investment is sold, thus the scheme should only be considered by investors that can afford to lock money away for long periods.
Seed Enterprise Investment Scheme
The SEIS is a tax-advantaged venture capital measure to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. It is similar and complements the existing EIS, which will continue to offer tax reliefs to investors in higher risk small companies. SEIS recognises the difficulties that early stage companies face in attracting investment, by offering tax relief at a higher rate than that offers by the existing EIS.
Export Enterprise Finance Guarantee Scheme
The ExEFG enables the facilitation of commercial export finance abilities to viable small and medium sized enterprises (SMEs), which lack the security necessary to obtain such facilities. ExEFG is a self-financing scheme through which the lender is provided with a guarantee for which the borrower pays a premium. The scheme covers a range of existing export products including letters of credit, export collections, bonds, guarantees and indemnities, trade loans and pre- and post-shipment financing. Exporters will approach participating banks and if appropriate will be offered a short-term guaranteed loan of up to £1 million, with the loans attracting an interest rate premium. Unfortunately the scheme was closed to new applicants in mid-June.
Funding for Lending Scheme
It will be a few months before we can see the impact of these Government finance schemes. This is a similar case for the Funding for Lending scheme, the replacement of the disappointing National Loan Guarantee scheme. £80 billion of loans have been pledged for the FLS. The scheme will run for the next 18 months when it will then be assessed. Under the scheme for every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the FLS. Those banks that reduce lending will have to pay higher fees to use the scheme.
We at MarketInvoice think that the Government taking the initiative and an interest in helping enterprise finance is very commendable. The Funding for Lending Scheme is probably the best attempt so far to encourage banks to lend however there is no guarantee that the plans will address the core problem of companies’ reluctance to borrow in the face of a eurozone debt crisis, business confidence is another factor that needs to be considered. Naturally we are big believers in alternative finance, but until the banks stop putting up barriers and encouraging invoice factoring and other unimaginative methods of funding, the only other viable alternatives for SMEs are solutions like crowdfunding, peer-to-peer lending and invoice finance.
- Can the Funding for Lending scheme help lending to small businesses? (thestartupmag.com)
- The City of London Corporation Programs For Entrepreneurs (thestartupmag.com)
- Steps to take when starting your business (thestartupmag.com)