There is little doubt that the SME loan guarantee scheme is a good thing for small business lending. However, growing criticism of the Chancellor’s plan is casting doubts over its effectiveness, a development that underlines the importance of alternative SME finance, including invoice finance.
The government has pledged to underwrite £40 billion of bank funding for SME lending, a move that it hopes will encourage high-street lenders, such as the state-owned Royal Bank of Scotland and Lloyds Banking Group, to improve access to SME credit.
But will this latest plan work? Some banks are making the right noises about SME lending but the threat of rising bank credit costs casts serious doubts over just how much credit banks are going to offer. In addition, there are questions as to whether the cuts to the cost of SME loans go deep enough and to the coverage of the scheme, which some believe to be skewed in favour of small businesses at the higher end of the earnings spectrum.
The government SME loan guarantee scheme is likely to help but, at the same time, it doesn’t seem to be the knight in shining armour that the small business sector was hoping for. So, what’s the answer? The Federation of Small Businesses has called on the government to free up alternative sources of SME finance so that small businesses can bypass mainstream SME lenders.
An increasingly popular form of alternative SME finance is invoice discounting. Flexible and without long-term commitments, it allows small businesses quick access to capital.
If 2011 has proven anything in terms of the problems surrounding SME lending, it is that there is no easy answer. Perhaps alternative small business finance products deserve as much attention as the mainstream ones.
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