Are we really open for business?

On hearing Business Secretary Vince Cable’s announcement at the Liberal Democrat conference, some people are bound to ask: “Haven’t we been here before?”

Mr Cable’s plan, to be fleshed out by Chancellor George Osborne in his autumn statement to parliament in December, will see the creation of a state-backed bank with a remit to support small and medium-sized businesses that have been starved of funding.

Although £1bn will come from the taxpayer, it is anticipated that with contributions from the private sector, £10bn worth of loans will be made available to firms.

The problem is that while the big banks say loans are available to businesses, many companies say this simply is not true.

Ismail Erturk, a senior lecturer in banking at Manchester Business School, told Channel 4 News a bigger issue was the reluctance of businesses to invest because they were not convinced there was demand for their products.

Long wait

The latest plan has been welcomed by the Federation of Small Businesses (FSB), which has long argued for a bigger role for the state in supporting companies that need finance, but it certainly will not provide instant relief – it could be 18 months before it is up and running.

The government are saying ‘we don’t trust the banks, let us set up our own bank’. Ismail Erturk, Manchester Business School

In recent months, two other schemes have been launched to get the economy moving.

Funding for lending (FFL) worth around £80bn, offers loans to bank at low interest rates, as long as they use this money to provide credit to households and businesses.

The scheme, set up in July, lowers the cost of borrowing at a time the economy desperately needs growth.

But the Institute of Directors has warned that firms concerned about the euro crisis will not be inclined to borrow more, even with favourable interest rates.

The Business Department told Channel 4 News that as it had only been running for three months, it could not yet provide a progress report.

There is also the national loan guarantee scheme (NLGS), unveiled in March, which is designed to bring down the cost of borrowing for small and medium-size businesses, with £20bn of guaranteed loans from high street banks.

Similar barriers

At the launch, the FSB said it was concerned that firms whose loan applications had been rejected could face similar barriers in future.

The Business Department said since March, £2.5bn of cheaper loans had been provided to 16,000 businesses.

It said that the state-backed bank scheme differed from previous initiatives because it was “not designed to deal with the immediate credit problems in the economy, rather it will deal with long-standing structural gaps in the supply of finance to SMEs…”

FFL and the NLGS have not been going for very long, but the latest borrowing figures from the British Bankers’ Association do not make for comfortable reading.

They show that net lending (after debts have been repaid) to non-financial companies has been negative since July 2009.

Referring to Mr Cable’s business bank, a BBA spokesman told Channel 4 News: “It needs to be remembered that only a little over one in 10 businesses want to borrow at any time.

“Most do not need, or want, external funding and for many others the current economic climate is too uncertain for them to want to take on debt. In many cases, as interest rates are historically low, those with credit are paying off their loans and overdrafts rather than taking out more credit.”

In other words, it would be wrong to assume that companies are queueing up for loans that are refused.

‘Massive relationship breakdown’

The FSB has a different take. A spokeswoman told Channel 4 News that a suvey of thousands of members had shown that “a large proportion” of businesses were not approaching banks for loans because they assumed they would be turned down.

She said that since the credit crunch, there had been a “massive relationship breakdown” between the banks and small businesses that was still unresolved.

One example she gave was the previous government’s enterprise finance guarantee scheme, designed to boost business lending. Although it had achieved national attention, she said, some businesses had approached their local banks for help under the auspices of the scheme only to be told that they had never heard of it.

That said, the FSB supports plans for a business bank, having studied similar models in Europe and the US.

‘We don’t trust the banks’

Ismail Erturk said while the latest scheme was “institutionally different” from previous models, in substance it was similar. He said: “The government are saying ‘we don’t trust the banks, let us set up our own bank’.

“British businesses are looking for evidence that whatever they produce will be purchased and the problem is that people are not buying – demand is not there – and creating a bank will not solve the problem. The problem is on the demand side.”

Mr Erturk said that before investing, business needed to be convinced that the government was committed to long-term investment in infrastructure, such as roads, rail, schools and social housing.