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Tuesday, 20 March 2012

Breedon's 11 Ways To Finance Small Businesses

Following a rapid but inclusive review, the Breedon Taskforce has recommended 11 ways to improve the financing options for the UK's smaller businesses. As a result, the next few years promise a wealth of innovation and competition in the market for SME finance.

The report confirms that net bank lending to smaller businesses will continue to decline due to the banks' own credit problems and the capital adequacy headwind. In fact, the report estimates a funding gap of about £26bn to £59bn for SMEs over the next 5 years, and an overall finance gap of up to £190bn for UK business sector as a whole.

But the Taskforce has found plenty of scope for growth in alternatives, both in the form of new funding sources, as well as more traditional finance options that have developed in countries where banks have not been so dominant.

The most interesting aspects of the report are: 
  1. the acknowledgement (in section 4) that the plethora of government interventions to date (EIS, EIG, etc. etc.) have failed to gain traction; 

  2. the recommendation (in section 5) for either an extension to the ISA scheme (as also submitted here) or a new 'Enterprise Savings Account';

  3. the acknowledgement (in section 5) that the financial regulatory and promotional framework presents barriers for investors and businesses alike (as also submitted here), and that capital controls and limits on unregulated investments are creating a culture of "reckless prudence" amongst regulated financial institutions (section 8);

  4. acknowledgement (in section 7) that there is "some sense" in the request by peer-to-peer platform operators for "proportionate regulation, to protect investors and provide confidence" (as also submitted here) but that officials are concerned that "over-zealous regulation would add to costs, destroying the market before it has a chance to gain scale organically;"  

  5. the recommendation (in section 7) that the government should lend in conjunction with the private sector via direct finance platforms;

  6. encouragement (in section 6) for standardisation to promote the trade in invoices;

  7. the recommendation (in section 5) to create an Agency for Business Lending that would "aggregate a large number of SME loans and finance them via the corporate bond markets" - although, presumably, this would have to be designed to avoid the downside of previous shadow banking activity which is unduly complex compared to direct finance (as also submitted here):

Source: Lipstick On a Pig, p.109.