More money in the SMB pocket

Further quantitative easing may not help SMBs as much as a boost to leasing and financing arrangements, argues Syscap's Philip White

The Bank of England finally announced in recent weeks, after months of speculation, that it would embark on a second round of quantitative easing. The move was intended to stave off a double-dip recession by stimulating money supply. The Bank of England said it would buy up to £75bn worth of assets from UK banks.

The theory is that this would free up their balance sheets, enabling more lending and delivering a boost to the economy.

There has been plenty of debate about the likely impact of this. But what seemed to have been lost at the time of writing was how relatively ineffective the massive £198bn first round of quantitative easing was at smoothing the path for SMBs to invest in the technology and other tools they need to grow and create jobs.

The reason for this can be found in where the quantitative easing did and did not facilitate investment. The programme was designed to enable the Bank of England to invest in a broad range of assets, including lease-backed securities.

These are essentially packages of real lease agreements for businesses to buy technology and equipment. There is already a market for them, but if the Bank of England became an active buyer, it would free up banks’ and finance providers’ lending capacity, and also reduce the cost of leasing.

This would be a direct way of improving the availability of finance for businesses that already suit leasing for a number of reasons, not least because it allows them to upgrade technology easily and cheaply as it becomes obsolete.

However, in its latest annual report the bank said it dedicated only £25m - just 0.01 per cent of the whole quantitative easing war chest - to buying lease-backed assets. The vast majority went into buying government debt in the form of gilts.

This neglect of a tool that plays such a crucial part in financing technology acquisition has been reflected in other government bids to boost the economy. Perhaps the most headline-grabbing of these was George Osborne’s brainchild Project Merlin, an agreement between the government and the UK’s four biggest banks to lend more money to small businesses.

But despite the fanfare, Bank of England figures published in July show lending to SMBs - as FPB’s Phil McCabe noted in CRN’s 24 October issue - was £2bn short of the targets set.

The less-exotically named Enterprise Finance Guarantee (EFG) scheme was launched in November 2008, by the then Labour government. It aims to increase the availability of finance for SMBs by providing a government guarantee for 75 per cent of the value of an individual loan to a business with a turnover of less than £25m.

But the EFG scheme has been faltering, with lending plummeting 42 per cent over the past year, and now unlikely to reach the £600m allocated for lending under the scheme in the current financial year.

The evidence suggests it is not lack of demand that is reducing the size of the scheme, but lack of affordable supply. Seventy-five per cent of the SMBs we asked in a recent poll indicated that they think bank lending margins on loans are too high. Only eight per cent said their ability to access bank loans has improved over the past year. Thirty-three per cent said it continues to get worse.

Like quantitative easing and Project Merlin, and despite submissions from the finance industry, the EFG excluded the funding of businesses through lease financing. Another form of asset finance, invoice financing, is allowed under the EFG but it is not directly related to a particular business investment and does not share leasing’s tax benefits or usefulness in spreading the cost of making new investments in IT.

The Treasury’s latest initiative is a credit easing programme, unveiled at the Tory Party conference. The Bank of England will buy the corporate bonds of smaller companies, as a facility for cheap debt.

But of course, a bond programme requires specialist financial advice, which as anyone who has ever dipped his or her toe into the world of investment banking knows does not come cheap, and is beyond the reach of most businesses.

And, despite this, SMBs continue to delay investment. Not to mention that both the UK government and European Banking Authority are moving to “de-risk” the banks - meaning there will probably be less, not more, bank lending.

For the economy as a whole, and the technology industry in particular, something has to fill the gap. Leasing has made a good comeback from the financial crisis, and has been successful at attracting more funders into the market. Proper attention from policy makers would help UK plc fire on all cylinders again.

Philip White is chief executive officer of Syscap