Margareta Pagano: It's time to try new ways to fill the business funding gap

Midweek View: Crap mortgages brought down Lehmans in the crash. We don't want crap business loans leading to the next

For as long as I've been writing about business, the big issue in Britain has been the chronic lack of funding for small and medium-sized enterprises; riskier capital for start-ups through to medium-term lending. The shortage was first highlighted by the Macmillan committee – including Ernest Bevin and John Maynard Keynes – set up in 1929 after the stock-market crash to look at ways of improving finance for industry.

Even then, the committee pointed out that our bankers were failing industry. It's where the phrase the Macmillan Gap comes from, and out of it grew the Industrial and Commercial Finance Corporation, set up with £15m in 1945 as a joint venture by the Bank of England and the UK's biggest banks to provide long-term equity investment funding with amounts of between £5,000 and £200,000 for SMEs.

The ICFC became the biggest provider of growth capital for unquoted companies during the 1950s and 1960s, and by the 1980s had become the leading source of finance for management buyouts. Renamed Investors in Industry – or 3i as it became known – it then made the mistake of floating on the stock market. Inevitably, 3i got greedy, searching out bigger deals, and forgot to mind the gap.

In many ways, Vince Cable's latest wheeze, which has Treasury backing, for a £1bn new business bank is another attempt to plug today's gap, one which has become wider since the financial crash. Research by the Cambridge & Counties Bank, which launched a few months ago, shows that in the second half of 2011, more than 60,000 loan and overdraft applications from SMEs worth as much as £3bn were rejected by the high street banks.

So you can see why Mr Cable's bank proposal, which could open up to £10bn of new lending from the private sector, has had a Marmite-style reception. Either businessmen love it because it shows the government is doing something positive, or hate it because it raises more questions than answers.

First, the new bank is a long-term solution. It won't be up and running for several years yet. Second, and more pertinent, there are concerns the new bank's funding could distort the allocation of credit, leading to the same problems of government-backed securitisation as those that led to the crash. As the Institute of Economic Affairs puts it, government – and the taxpayer – should not be taking the risks from business lending that banks are not willing to bear themselves.

There are much better ways to plug Cable's Gap, and most of the tools exist if only government would get its act together. Part of our problem is not that the banks are not lending, but that they have stopped providing the full range of facilities to SMEs that they used to.

William Tebbit, commercial director at Trade Finance Partners, says the Coalition doesn't get it: "They don't understand the problem so have come up with the wrong answer." Most companies need help with working capital, rather than loans, and with export finance, he points out. These are vital areas where the banks have stopped providing or take so long to decide that companies either lose orders or give up.

Businessmen should be looking for alternative ways to free up working capital such as leasing, invoice discounting, factoring, trade finance and specialist financiers who underwrite the supply chain. It's good, old-fashioned merchant banking, and is already making a comeback in response to the crash.

Crowdfunding is another alternative that gives power back to the public and away from the banks, and should be encouraged – with health warnings. More needs to be done to persuade the wealthy to put their money behind a new generation of entrepreneurs. Instead of making inane comments about taxing the rich, it would be better if Nick Clegg suggested improving the Enterprise Investment Schemes with better tax breaks.

Councils and pension funds should be encouraged to put their money behind brilliant new ventures like the Cambridge bank. Backed by the county council's pension scheme and Trinity Hall, it was set up because local figures were so worried about the shortage in local funding. As Tebbit, who has his father's knack for shooting from the hip, says: "Crap mortgages brought down Lehmans in the crash. We don't want crap business loans leading to the next."

Mr Cable has identified the right shortfall but needs to go back to the drawing board to fill in the gaps. Otherwise we will be writing about this for decades to come.

Arts and Entertainment
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
Is this how Mario Balotelli will cruise into Liverpool?
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed