Chancellor considering plans to broaden SME lending

The Chancellor, Alistair Darling is looking at ways of enabling small and medium-size firms to borrow money from sources other than the major high street banks.

There have been consistent complaints that SMEs are struggling to raise capital from the banks.

Under the mooted plans, SMEs would be able to apply to borrow money from City pension funds and insurance companies.

The move could form part of a package of measures aimed at enhancing business borrowing, which the Chancellor will announce in his pre-Budget Report.

It is thought that the scheme would principally target medium-sized firms, which have found themselves starved of investment capital but which are too small to approach the capital markets.

Although not yet set out in detail, the plan could see SMEs offered loans in the form of bonds for a set minimum period. Investors would receive a rate of interest at a higher level than that provided by high street banks.

Some 92 per cent of SME lending currently comes from the four major banks.

The government, however, is uneasy that a combination of their dominance of the market and their reluctance to lend could stifle economic recovery.

Writing in the press, Mr Darling said: “If there is one lesson to be learnt from this crisis, it is that credit must never be allowed to dry up because of reliance on a small number of banks.

“In the same way that big companies can access funding directly from capital markets, by issuing bonds or commercial paper, I want to start creating a different financial model in the future, in which small companies get funding from sources other than banks. Our goal is to make finance the servant, not the master, of the real economy.”