Stop Subsidising the Banks, UK Firms Need a Full Order Book!

Last month, George Osborne launched a new scheme to revive the SME economy, called Funding for Lending. He needs it to deliver an economic miracle to turn around the Tories' poll ratings. Sadly for the economy, but happily for the Labour Party, it's unlikely to succeed.

Last month, George Osborne launched a new scheme to revive the SME economy, called Funding for Lending. He needs it to deliver an economic miracle to turn around the Tories' poll ratings. Sadly for the economy, but happily for the Labour Party, it's unlikely to succeed.

Under Funding for Lending, the Bank of England will provide up to £80bn of cheap loans to banks, at below market rates, in exchange for them lending the money to households and small and medium-sized businesses. The aim of the scheme is to stimulate the economy by reducing the cost of borrowing; in Osborne's theory, this should increase loans to credit-starved businesses and households. It all sounds good, but will it work in the real world?

Having spoken to a wide range of contacts in business and finance, the answer appears to be a resounding "no." I am of the opinion that the government should help the economy by ensuring companies have a pipeline of work rather than endlessly subsidising the banks.

To give an example, on Friday last week, I spoke with the owner of a major construction firm. His business is huge, with a turnover in the hundreds of millions. Presumably, the price of loans dropping would make an impact for him? His response to me: he had no problem getting credit; the price that credit came at was not a concern for him. The real worry was about what his order book would look like in three months time. He didn't want to take on debt, no matter the price; he'd rather keep the cash he has on hand, so he could keep his business going in case that order book didn't fill up.

At the other end of the scale, I speak to the owners of growing SMEs up and down the country every day. Even in these smaller business, they aren't overly worried about their ability to get credit - new finance businesses like the one I run, MarketInvoice, have given them a plethora of options outside the banks. They don't mind the price that credit comes at - if they need credit for cashflow, there's no quibbling about 1% on the interest rate when failing to get a loan may mean your business can't keep trading. The problem really is that these businesses have access to credit but just don't want to use it. They see spending money, such as expanding their firm quickly, as a big risk.

In the current economic climate confidence is at an all time low. This is just typical of what I hear every day. If businesses small and large are determined to hoard cash, then the new loans - whatever the price - will not be taken up. As for those willing to borrow, many are so indebted that the banks won't lend to them anyway. Put simply, the creditworthy won't take loans and the uncreditworthy won't get them.

There must be a good reason why a business should take out a loan, not credit for credit's sake. Pumping credit into the economy doesn't solve fundamental problems; cheap credit leads us into other difficulties. Cheap credit keeps bad and uncompetitive 'zombie' companies in business. This is bad for the market. So what should the government do?

Last week Osborne announced that the Treasury was looking into setting up a Government-backed small business bank. Although the exact details have not been released it is said that the British Investment Bank would not compete with high street banks or take deposits but will have a strong private sector focus. It would be responsible for the plethora of schemes existing in Whitehall e.g. the Business Finance Partnership & Enterprise Capital Funds. This proposal has been welcomed by the British Chambers of Commerce, who are big advocates of the idea. The Chancellor has naturally come under attack by members of the opposition for, funnily enough, copying their proposal. Labour put forward a policy review discussing the idea of a British Investment Bank. Nicholas Tott, a former partner at the leading international law firm, Herbert Smith LLP, carried out the report that was released in July of this year.

My opinion is that anything set up to help small businesses acquire funding is a good thing however we need to look beyond just creating another bank that might become the next RBS, backed at the expense of the tax payer. Originally a small business bank was a Labour scheme touted in 2002 under the name: Regional Venture Capital Funds. It is not surprising that the new Labour report makes no mention of this earlier fund. It was a flop. Private sector cash was matched by the state coffers and ploughed into young businesses. £93 million of tax money was turned into just £5.9 million, a 93% fall.

I am worried that a state-backed business investment bank will crowd-out the market and stifle private sector innovation. This is very close to my heart, having co-founded an online finance firm it's frustrating to see so much money being pumped into the traditional lending sector - there's a real risk of great alternatives to traditional funding, tech finance startups, being side lined by subsidies on this scale.

If Osborne wants to win the next election - and he should, considering he is both Chancellor and the Tories' chief election strategist - he should adopt a plan that works. We've tried cutting our way out of the recession, and it hasn't worked. Thus, Osborne should swallow his pride and spend. Long-term investment is the key.

We have historically low bond yields thanks to the Bank of England's Quantitative Easing programme - the least Osborne could do is take advantage of them. He should increase borrowing to build big infrastructure projects like a new hub airport for London, a huge social housing construction programme, widening motorways, replacing our aging power plants with newer, cleaner ones and rolling out high speed broadband across the country. According to the Office for Budget Responsibility that Osborne set up, infrastructure projects are the most effective stimulus. Investing in education must also be a priority, as well as retraining for the long-term unemployed. This will create a more competitive and skilled workforce.

Even if George Osborne isn't convinced by the economics, he should be convinced by the politics of it. A stimulus will not only leave us with more jobs and more money in the economy, but also with a vastly upgraded country. Infrastructure is an investment in the future - what we build now will be enjoyed by future generations. His current plan is to print money and give it to the banks; wouldn't printing money and investing for the future be more effective?


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