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New state-backed bank to provide longer-term loans to small companies

The business secretary has laid out the Government’s plans to create a small business bank to provide longer term finance to UK companies which is currently hard to access from the risk-adverse high street banks.

Just last week, Vince Cable said that the Coalition’s plans for a small business bank were merely “in gestation”, however the plans would appear to have developed significantly in a short period of time – no doubt so that the Business Secretary has something positive to bring to the Lib Dem conference.

Although details are very sketchy, currently the Government intends to provide £1bn of public money to the new institution, which aims to attract private capital to provide up to £10bn worth of loans to small and medium sized companies.

The significant thing about the new bank is that it will not provide loans itself. It will actually buy longer-term loans made by high street lenders, then package then up into bonds which will be offered to investors. Clearly, the new investment bank will enable major lenders to provide finance for smaller companies, at a lower risk, as such loans will subsequently be taken on by the Government.

As Robert Peston states in his BBC blog – “it is an attempt to give securitisation – the packaging of loans in to bonds, the process that wreaked so much havoc in the 2007/8 financial crisis – a good name.”

Positive reaction from business organisations, so far…

Reaction to the news, now that a small business bank appears to be a real proposition, has been positive so far.

Reacting to today’s announcement, John Cridland, CBI Director-General, said that the bank “could also play a vital role in packaging up and selling debt from medium-sized companies, allowing them to access vital finance streams.”

John Walker from the FSB said that the new bank would stimulate competition amongst the ‘Big Five’ high street banks; “We are certain the newly created ‘small business bank’ will help boost confidence and deliver growth in the economy.”

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