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Cable suggests creation of state-backed business bank

In a speech delivered to an audience at Imperial College this week, Vince Cable outlined his plans to create a Government-backed business bank. However, many commentators appear to be underwhelmed by the proposals.

Although the plans are currently at an early stage, the Secretary of State suggested that the new financial institution could operate via ‘alternative providers’ and non-bank lenders.

Plans for business bank “in gestation”

Cable said that urgent action was needed to provide businesses with access to finance. He quoted the data contained in the latest SME Finance Monitor, which shows that one third of all smaller businesses who applied for loans over the past year, were rejected.

Cable said that large banks “are preoccupied with repairing damaged balance sheets”, despite being urged via previous initiatives to increase their lending to small and medium sized businesses. As a result, many start-ups are increasingly reliant on borrowing money from “friends, family and fools”.

As a result, the Government say that more competition is needed in the lending marketplace, with more diversity of supply.

The Secretary of State outlined the initiatives the Coalition had already implemented in an attempt to provide finance to businesses following the economic crisis: Enterprise Capital Funds and the Enterprise Finance Guarantee to help firms access VC or bank finance, the Business Finance Partnership (to develop non-traditional sources of finance). Cable also mentioned the £2.5bn Business Growth Fund which has been set up by the major banks.

Reaction to Cable’s announcement underwhelming

Reacting to the Government’s announcement, the Federation of Small Businesses gave a cautious welcome to the prospect of a small business bank: “While it is urgent to address access to finance, it is critical to get the right structure in order for it to work properly. It must be for the long-term and not just a short-term measure for the recession.”

Many other commentators have met the announcement with scepticism. Rob Donaldson from Baker Tilly summed up the views of many – “I think today’s announcement has left us all scratching our heads at both the concept and the lack of detail.”

Donaldson suggested that the Government should focus more on reducing taxes and regulations on businesses that spending time and money on the creation of a new institution.

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