How the Funding for Lending Scheme works

IN: Business news

The Funding for Lending Scheme (FLS) was initially launched by the Bank of England (BoE) and HM Treasury in July to boost lending to businesses.

It works by enabling banks and building societies to borrow from the BoE for up to four years, encouraging them to fund small and medium-sized enterprises.

Banks have a strong incentive to boost lending by lowering interest rates and raising the availability of business loans and mortgages to small firms.

The more financial institutions lend to businesses, the more they can borrow from the BoE, creating a favourable environment for both lenders and businesses in search of funding.

As part of the initiative, banks that increase their lending will benefit from paying the lowest fee on their borrowing, while those that reduce their lending will pay a higher fee.

From an SME's perspective, this provides a great funding opportunity that can help to grow a business, which might otherwise suffer in the challenging market conditions.

According to the Department for Business, Innovation and Skills (BIS), there is "a significant proportion of SMEs that are discouraged from applying for finance because they think they will be rejected".

However, with FLS aimed at ensuring businesses get the support they need, SMEs worried about being rejected for finance can breathe a sigh of relief as their chances of being approved for a loan are aided by the Scheme.

Aldermore is participating in the FLS and when the BoE published its lending figures for the FLS on 3 December, Aldermore was identified as lending the fifth largest amount since joining the Scheme in September.

In the same month, the Bank had already announced it had lent more than £1 billion to SMEs since its launch in 2009.

In a report from the BIS entitled 'SME Access to External Finance', it was shown that while half of businesses use external finance, 20 per cent of firms seek funding at any one time.

Banks remain the primary source of finance, and with the FLS in full swing after fully opening in August, now is the time for SMEs to harness the benefits and aim for growth in 2013. 

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