Vince Cable, the business secretary, says that the suggestion to set up a new government funded bank to lend to SMEs, would not be effective in tackling the crisis those businesses face when trying to obtain credit.
Adam Posen, a member of the Monetary Policy Committee, has called on the coalition to create a new bank specifically to address the needs of small businesses, such as those that require umbrella company contractors. He said that if the government injected £6 billion into the new bank, it could lend £60 billion to small companies.
Posen’s scheme, which he named British Enterprise Investment Equity, has not received much support and now Cable has said he does not believe that setting up a new institution will get speedy action. He pointed out that it can take a couple of years to get things legislated and the problem of small business finance is something that needs to be tackled urgently.
Cable and Posen do agree that there should be another round of quantitative easing, which should lead to small businesses finding it easier to obtain business loans from their bank.
However, the latest Credit Conditions Survey from the Bank of England suggests that lending conditions are not set to improve in the final quarter of 2011. In fact, they could get worse as lenders are expected to tighten collateral requirements and loan covenants.
The survey did point out that lending decisions are influenced by the risk attached to the sector in which a business operates. A firm in a safe sector is much more likely to obtain credit than one in an industry that is deemed more risky.
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