Osborne Faces New Lending Headache

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George Osborne faces a fresh headache over Government efforts to stimulate small business lending amid delays to the launch of part of a flagship scheme announced almost a year ago.

I understand that elements of the Business Finance Partnership (BFP), a programme designed to reduce small and medium-sized companies’ (SMEs) reliance on bank funding, have been held up by demands from Government officials for additional legal checks on potential private sector partners.

Applicants to join the initative, which are understood to include companies such as Octopus Investments, have been informed in recent days that fresh details of the arm of the BFP scheme which they are applying to join will not be included in the Chancellor’s Autumn Statement on Wednesday.

Officials have signalled that funds may not now be made available through the project until next spring.

"This sort of financing arrangement is new, so it is natural that we are conducting additional legal due diligence on the applicants," a Whitehall source said.

The delay may only amount to a matter of weeks, but it is understood to have irritated some senior Treasury figures because the BFP funding tranche affected is designed to assist with supply chain finance and other areas that business groups say they are struggling to access through high street banks.

ING, the Dutch bank, and Royal Bank of Scotland (LSE: RBS.L - news) (RBS) have both scaled back their leasing activities, heightening a supply shortage of such finance for SMEs.

The BFP has different strands targeting small and mid-sized companies, with the Department for Business, Innovation and Skills (BIS) responsible for the tranche aimed at smaller firms.

Speaking in May, Vince Cable, the Business Secretary, said the scheme would provide an essential service to bank finance-starved companies:

"As businesses are continuing to struggle to get credit from their banks, developing alternative lending channels so firms are less reliant on banks is essential.

"The Business Finance Partnership will help to develop these channels over the medium term so businesses seeking credit have more options available to them. Our aim is to create a more diverse financial infrastructure which better serves the needs of our small and medium-sized companies."

A BIS spokesman said: "The Business Finance Partnership will help to develop alternative lending channels for small and medium-sized companies. Successful proposals will be announced shortly."

News of the delay to the BFP comes on the day that the Bank of England released data showing that the Government’s flagship Funding for Lending Scheme (FLS) has got off to a weak start.

In August and September, banks and building societies accessed more than £4.3bn of funds but increased net lending by just £496m, with Barclays (LSE: BARC.L - news) by far the largest net contributor.

Between them, Lloyds Banking Group (LSE: LLOY.L - news) and RBS, the two banks part-owned by the taxpayer, decreased net lending by more than £3.4bn as they reduce the size of their balance sheets.

The launch of FLS effectively superseded the National Loan Guarantee Scheme, a programme of so-called ‘credit easing’, which was shunned by major banks including HSBC (LSE: HSBA.L - news) .

The British Bankers' Association said: "These first FLS figures are a snapshot at the very early stages of the scheme and therefore the full impact is not yet reflected in the net figures. As the scheme embeds in banks, we should continue to see the scheme acting as a driver for competition, benefiting all borrowers and therefore the wider economy.

"There should be no doubt that now is a good time for businesses and households to approach their bank to discuss their investment needs to sustain the economic recovery."