Small businesses are borrowing less, which could threaten their future growth, the Federation of Small Businesses (FSB) has warned. A report last week showed that bank lending to non-financial businesses fell by £698 million in July and according to the FSB this drop is not driven by a switch to alternative lending.
The latest Voice of Small Business Index shows that only 14 per cent of small firms applied for external finance in the three months to June.
Lower levels of borrowing will stall investment which in turn impacts entrepreneurial growth ambitions in the medium-term. Some commentators have speculated that the slowdown in borrowing is due uncertainty around Brexit negotiations.
Earlier in August, the UK government, in planning for Brexit, proposed a new national investment fund to support the growth of start-ups in the UK, fearing a loss in access to funds from the European Investment Fund (EIF) after its exit from the European Union.
EIF-backed funds have participated in around £1 billion per year of private equity investment into UK firms between 2014 and 2016. The Autumn Statement 2016 included a commitment for £400 million in venture capital funds over the next four years, but the government now states that there is a strong case for new investment significantly beyond this commitment.
The proposed new fund is part of a consultation titled ‘financing growth in innovative firms’, which will assess whether start-ups have access to the finance they need and improve confidence for small firms about their future after Brexit.
Commenting on the new funding arrangements, Chancellor Philip Hammond said, “Britain is an innovation powerhouse and it’s vital that we make sure our cutting-edge firms have the funding they need to meet their potential and conquer new markets. Meeting this challenge will boost our productivity and enable us to create more well-paid jobs across the UK.”
The Treasury will look into the feasibility of spinning off the new project into a public-private partnership once it has established a sufficient track record.