Funding for Lending Scheme Extension is Good News for Smaller Lenders and SMEs

The Bank of England’s announcement that it is providing a two-year extension to the Funding for Lending Scheme (FLS) has given a boost to the growing number of challenger banks and SMEs on hunt for cheaper finance and access to funding.

The FLS was launched in 2012 at the height of the credit crunch and was designed to provide banks with a cheaper source of funding which in turn would be passed onto SMEs in the form of cheaper loans.

As we have discussed in previous blogs in the years since the scheme was launched it has drawn criticism that its effectiveness was questionable. This may be the case amongst the High Street banks where usage has been patchy (except for part Government-owned Lloyds) but the rising challenger banks have taken advantage.

The latest figures available to the end of June 2015 in respect of the second tranch of FLS funding show how much banks which have accessed the scheme have outstanding. The figures also show that smaller lenders have taken advantage.

Lloyds £24b
Nationwide £8.5b
Yorkshire Building Society £3b
Virgin Money £2.7b
Santander £2.2b
Coventry Building Society £2b
Skipton Building Society £855m
Aldermore £710m

The extension which has been announced will provide those banks participating in the scheme with additional flexibility to draw any unused drawing allowances up to 31 January 2018. The extension also introduces a gradual phasing out, with borrowing allowances reducing over time. The reasoning behind this phasing is to minimise the risks of a sudden withdrawal of funding support.

The Bank of England has also announced that there will be a separate part of the scheme to allow new banks which are not already participating to draw against new allowances over the two-year extension. This is to ensure that new banks, which may not otherwise have any borrowing allowances under this extension given the lack of a prior lending history, are not put at a disadvantage relative to other banks that have access to the scheme. This will provide newer lenders with a window of opportunity to take advantage of the scheme so widening funding options for SMEs.

Looking at the latest bank lending figures to the end of September SMEs are benefiting from increased bank lending. The figures show that gross lending (new loans and utilised overdrafts) in September amounted to £5 billion. However, set off against this is the amount of loans and overdrafts repaid in the month which came to £4.5 billion and as a result net lending to SMEs was to £500 million to the positive.

An increase in the net lending figure is coming more frequent and in the 12 months to September the growth in amounts outstanding to SMEs (loans and overdrafts) was 0.7%. Doesn’t sound a lot? Compared to historic figures of a fall in amounts outstanding of 3% to 4% this nominal increase is a major win!

There is still way to go but with the FLS extension and a growing range of finance options SMEs are in a far better place than they have been for a long time.

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