Firms facing a £190bn funding gap, warns task force

Businesses could be deprived of up to £190bn in finance over the next five years unless action is taken to enhance their ability to borrow, a Government-appointed task force warned yesterday.

The task force, led by Tim Breedon, the chief executive of Legal & General, recommends a Government feasibility study into an agency to securitise small businesses loans.

"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," Mr Breedon's report said.

Among other recommendations is for the Government to investigate tax incentives for lending to small and medium-sized firms, to put pressure on larger companies to pay their bills to smaller suppliers more promptly, and to invest in small business investment funds (to encourage private investors to do the same).

Without this action, there will be a funding gap for firms of between £84bn and £191bn over the next five years, the report estimates. Between £26bn and £59bn of this shortfall would affect smaller businesses.

The report also suggests that the Government should put a single agency in charge of all the various official schemes designed to help firms access finance.

The Treasury's Project Merlin deal was designed to increase lending flows to small firms, but it was criticised as being ineffective since it set gross, rather than net, lending targets for the major banks. Total net lending from the five main UK banks fell in every quarter of 2011.

Merlin came to an end in February and has not been extended. The Government is set to replace it with a £20bn national loan guarantee scheme next week, which will guarantee banks' funding provided they lower the cost of loans to small firms.

The Breedon report was welcomed by the CBI.

Its director-general, John Cridland, said: "The UK lags well behind the US in the ability of mid-sized businesses to issue private placements. As the Breedon review says, further work is needed to solve this."