Move to find finance alternatives for credit-starved small firms

With traditional forms of lending to Small and Medium Enterprises (SMEs) in short supply, the UK industry group the Forum of Private Business (FPB) says that a move away from bank lending could help many firms to stay afloat.

It is urging the UK government to look into creating more alternative options for small businesses which have been denied finance by traditional sources of lending. The call came in the wake of an official report, which found that the banks have broken their promises to lend to small businesses, placing many in danger of insolvency.

While the FPB is continuing to lobby for banks to increase the supply of credit to small firms, it is also arguing that counter-cyclical alternatives need to be put in place which will be less affected by recession and will increase choice and diversity in the marketplace.

The options proposed by FPB include corporate bonds, leasing, invoice financing, supply chain credit and venture capital. The Forum is also arguing that the government should consider steps to reduce small firms’ dependency on external finance altogether.

FPB policy representative Matt Goodman said smaller businesses are too dependant on the banks for finance. “At the same time, the recent crisis in the banking industry has made it clear that access to credit should be less dependent on the economic cycle. Any way of reducing the ‘feast or famine’ view of credit needs to be resolved before the next economic downturn.

The government needs to put credible alternative sources of finance in place which will reduce the bank’s monopoly on lending, Goodman added.