'£190bn funding gap' for businesses

Businesses will face a £190 billion funding gap in five years unless more is done to stimulate alternative forms of lending to banks, a Government-backed taskforce warned today.

Many small businesses are already struggling to borrow money as banks rein in loans but the committee, led by Legal & General boss Tim Breedon, warned the problems will intensify when demand for credit increases as the economic recovery gathers pace.

The report, which warns the economy is at a critical stage, predicts demand from businesses for credit will outstrip supply by between £84 billion and £191 billion over the next five years as banks continue to hoard cash.

It calls for a single Government agency to support small businesses, similar to one in Germany, and for a new body to bundle together and sell loans to help small businesses gain access to finance.

And the Government's Business Finance Partnership should consider investing in loan funds for small businesses.

It also says large businesses, many of which are sitting on large cash piles, should do more to help smaller firms, including paying them more swiftly, and the main accountancy firms should set up a new business finance advice network.

Mr Breedon, chairman of the task force, said: "There is compelling evidence that access to finance is expected to become more acute as business confidence and growth returns, whilst continuing bank deleveraging is likely to leave a significant funding shortfall.

"Whilst there is no silver bullet to addressing this issue, we have made a number of recommendations which I believe will collectively help open up alternative financing channels for UK SMEs (small and medium enterprises)."

The report comes ahead of the announcement early next week by Chancellor George Osborne of his £20 billion credit easing scheme to boost lending to small businesses.

Of the predicted shortfall in business lending over the next five years, an estimated £26 billion to £59 billion will hit SMEs.

The report said the Government needs to start cleaning up the "alphabet soup" of business support schemes to help them tap in to alternative sources of funding.

It also suggested the Government could announce tax incentives to encourage investments into SMEs.

John Walker, chairman of the Federation of Small Businesses, urged the Government to take forward the recommendations as soon as possible.

He said: "Bold action needs to be taken to ensure a behavioural shift so that small firms know what alternatives to bank finance are available."

Business Secretary Vince Cable said: "We need to reshape the UK's finance landscape to better serve the needs of ordinary businesses, helping more companies find the support they need to start and grow.

"I hope this will represent a turning point in business finance in this country."

The UK's biggest banks missed their Project Merlin targets agreed with the Government for lending to small businesses by £1 billion last year, although they exceeded targets for overall business lending.

There is not expected to be a similar agreement this year and banks claim there is not enough demand from small businesses to meet their targets.

PA