Tension is mounting around the Chancellor’s national loan guarantee scheme. While comment on the SME credit initiative has been largely positive, doubts are growing over its viability. These concerns emphasise the role of alternative SME finance services, including invoice finance.

With the final details of the government’s small business credit scheme due to be announced a few days before the 2012 Budget, a number of high-street banks, including HSBC, Barclays and Santander, have questioned the initiative’s ability to deliver cheaper SME loans. Again, banks have stated that the shortfall in SME lending is due to lack of demand rather than unsuitable terms.

Of course, small businesses argue that the opposite is true – poor terms mean that a lot of SME lending applications aren’t getting completed in the first place. Interestingly, a growing criticism from the SME sector is that the focus of banks’ SME finance products is too heavily skewered towards companies at the larger end of the SME scale. The products available for these businesses aren’t suited to much smaller companies.

Where does this leave these small companies? The answer is alternative finance and, while the call for an SME bank may have grabbed the headlines of late, is it small business lending services such as invoice discounting and factoring that are driving the expansion of this sector. As these figures from the Asset Based Finance Association show, the ability of invoice finance to provide access to capital on better terms is fuelling its popularity.

Tellingly, as part of its call for tax cuts for business, the CBI put forward an argument for making the cost of equity finance tax deductible for SMEs. That the CBI is asking for use of the likes of invoice finance and asset finance to be made easier for SMEs underlines just how important alternative small business finance has become.

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