Rumours of an extension to the Funding for Lending Scheme (FLS) were confirmed by the Bank of England and HM Treasury this week.
Previously due to expire in early 2016, the two-year extension will see banks getting further support to fund SMEs until the scheme is phased out in 2018.
The scheme was launched in 2012 to encourage high street banks to lend to businesses by cushioning the costs of lending; banks can claim £5 for every £1 lent to SMEs. Banks' allowances will decrease by 25% after 6 months, with a further reduction of the same amount every half-year until the end of January 2018. According to the Bank of England, this will prevent any impact to economic recovery.
Existing initiative participants can draw more allowances on loans made up to the end of 2015, but new members can claim allowances on lending over the coming 2 years.
An additional initiative will open up the scheme to new members such as challenger banks authorised since April 2013. Although many newer banks are yet to build up a solid lending history, they'll still get access to the scheme, so they're not put at a disadvantage compared to the bigger banks.
George Osborne said the FLS is a vital part of economic recovery. He added:
The Funding for Lending Scheme will be gradually wound down as the recovery strengthens, delivering a managed exit from the scheme. George Osborne, Chancellor of the Exchequer
His firm's own research has shows that big banks are rejecting more than £1 billion of SME credit applications each quarter. Many of these ventures are financially strong and viable enterprises, but often fail to meet the banks' criteria.
UK businesses have wised up to the fact that they can get a better deal and a better service with an alternative finance lender. This is evidenced by the fact that the market which was worth around £270 million in 2012, is pushing the £5 billion mark. Max Chmyshuk, Fleximize
Launched in 2012, the FLS aims to boost the UK's economy by encouraging high street banks to lend an additional £70 billion to businesses, with a focus on small and medium-sized enterprises.