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Government to launch ‘small business bank’

September 24, 2012

The Coalition is taking the “first steps’ towards creating a Government-backed business bank, which could support up to £10bn of new lending to small businesses.

Business Secretary, Vince Cable, who last week said that his plans for such a bank were in “gestation”, will announce that the new bank will be backed by public funds (including an initial £1bn cash injection), and would aim to attract private sector funding over the next year and a half.

According to the Government, the new institution will fill the “long-standing, structural gaps” in the traditional sources of finance for businesses – and will centralise the Government’s financial support for small enterprises in a single place.

Importantly, the Business Secretary says that the new organisation will operate independently, and will commercially run. Its purpose will be to facilitate loans to businesses through other banks and institutions.

Although details are rather vague at this early stage, the new bank will not displace traditional banks, nor will it have a retail banking presence. Further details are expected to be published over the coming months.

Vince Cable said that the UK’s businesses had long suffered from access to long-term financial products, which are available in other nations.

“Having a functioning, diverse supply of finance is an integral part of the Government’s industrial strategy. It is all about making the right decisions now to secure our long-term industrial success.”

The BBC’s Robert Peston’s reaction to the announcement is worth a read. In his blog, Peston explains that the Government’s intention “is that these would be longer-term loans with a maturity of about 10 years, that small businesses find hard to prise out of our risk-averse banks.”

The Federation of Small Businesses has welcomed the news, saying that the UK has needed this type of finance model for some time, and it could stimulate competition amongst the major high street banks.

“We are certain the newly created ‘small business bank’ will help boost confidence and deliver growth in the economy.”