Government Support for Business - Business, Innovation and Skills Contents

2  Access to Finance

British Business Bank

Background and objectives

7. Businesses "require finance for working capital and to invest for future growth".[12] Ensuring that finance markets work for businesses is therefore vital to support the UK economy. In 2012, the Government announced its intention to "build a single institution that will address long-standing, structural gaps in the supply of finance", bringing together all Government finance support for small and mid-sized businesses into one place.[13] It stated that the resulting British Business Bank would have "a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy".[14] In 2013 the Government stated that the British Business Bank would have the following objectives, amongst others:

·  To support the development of diverse debt and equity finance markets for businesses, promoting competition and increased supply through new finance providers;

·  To increase the provision of finance to viable but underserved businesses, in particular improving the provision of long-term finance; and

·  To bring together the management of the government's existing business finance schemes, creating a single portfolio and simplifying access.[15]

8. On 1 November 2014 the British Business Bank began operating independently from the Department of Business, Innovation and Skills. It stated that its goal was:

    To change the structure of finance markets for smaller businesses, so these markets work more effectively and dynamically. This will help businesses prosper and build economic activity in the UK.[16]

It aimed to achieve this by increasing the supply of finance available to smaller businesses, creating a more diverse and vibrant finance market for smaller businesses and increasing smaller businesses' understanding of the options available to them.[17]


9. When the Government announced its intention to establish a British Business Bank, it was proposed as the solution to finance issues that affected all "viable but under-served businesses".[18] Our inquiry therefore questioned whether access to finance had improved in recent years and whether this intervention was still justified. We found differing views. For example, the Federation of Small Businesses told us that "many small businesses are still finding it difficult to access the finance they need".[19] Its research showed that "47 per cent of small businesses believe credit is unaffordable and 24.8 per cent of small businesses have found the availability of credit is very poor".[20] In addition, it reported that "only 50 per cent of small businesses that applied for credit were granted finance".[21] In contrast, the British Bankers' Association told us that:

    The banking industry is committed to supporting businesses to grow through providing finance to enterprises both large and small. Several datasets provide evidence that lending to SMEs is improving, and that businesses are confident that lending conditions will continue to be favourable.[22]

Stephen Pegge, Group External Relations Director at Lloyds Banking Group, further suggested that "businesses are more likely to get finance than they think they are" but there was "a certain perception" that funding was not available.[23] Phil Orford, the Chief Executive at the Forum of Private Business, accepted this, stating that there remained an "ongoing uncertainty" amongst businesses about the attitude of banks to requests for lending.[24]

10. When it came to the overall picture on whether access to finance for SMEs was improving, Keith Morgan, the British Business Bank's Chief Executive, said that it was "hard to see through the data".[25] He explained that demands from business for finance were changing:

    Our surveys and contacts show that whereas two years ago the major demand for finance was for working capital, the major demand for finance is now for investing in new fixed assets. That, of course, is very consistent with a sense that there are growth intentions among small businesses. […] Overall, the trend looks like it is improving, but we still think that there are some significant gaps in the marketplace, which is what has been driving us in terms of where we are focusing our activities for the first year.[26]

11. We have heard varying evidence about the availability of finance for SMEs. Given the importance of such access in supporting business, the Government should ensure it is drawing on the British Business Bank's expertise to maintain an overview of how the financial environment for SMEs is developing so that this information can be fed into policy development. The Government should work with the British Business Bank to establish whether regulation or funding is required to address the obstacles that businesses face when trying to access traditional finance. The Government should review and develop a comprehensive understanding of how these traditional finance markets are operating and, if necessary, it should develop new lending policies or models.


12. Working to "increase the diversity of offers in the marketplace" is a key priority for the British Business Bank.[27] Despite this, we heard that owners of businesses often only considered traditional finance options, such as bank loans, overdrafts or personal funds when seeking capital for investment. As a result, Mike Cherry, National Policy Chairman at the Federation of Small Businesses, told us that "85 per cent of lending to small businesses" remained "with the four main high-street banks".[28]

13. Stuart Garner, Chief Executive Officer of Norton Motorcycles, told us that a "mind-set change" was needed from SMEs, so that traditional finance was not seen as the primary, or only, option for a business seeking financial support.[29] Mr Garner praised the British Business Bank for its "brilliant job" in supporting finance through non-traditional providers.[30] He told us of his positive experiences using alternative finance support with a finance company called URICA,[31] saying that, since using that provider, "the only reason why I need a legacy bank in my business at Norton is for a long-term property or as a clearing house".[32] Similarly, Matthew McDonnell, the Managing Director of Resimac, told us that discovering URICA as an alternative finance provider had "transformed" his business".[33]

14. We spoke to URICA about its work. One of its founding Directors, Ian Fitz-Harris, explained that businesses did not only require finance for capital investments, but also needed improved payment systems and supply-chain credit, which alternative providers could help supply. He believed that the British Business Bank was a positive development and that it understood the issues facing smaller businesses, and described it as "an excellent idea" and "well run".[34]

15. With this positive feedback in mind, it seemed that making sure businesses were aware of available alternative providers was key to improving uptake of these alternative finance options. Stuart Garner, the CEO of Norton Motorcycles, told us that the British Business Bank should identify what type of finance was required by businesses:

    We need a menu to say, "Supply chain finance: these are the people to call. Invoice finance: these are the people to call." We are not doing a very good job of communicating what is available. We could probably fund so much more business if businesses actually knew what was available to them.[35]

Similarly, Carl D'Ammassa, Managing Director of Asset Finance at Aldermore Bank, said that his bank did not want SMEs to feel that when they had been rejected by their clearing bank, there was nowhere else to go, stating:

    There are lots of alternative funders out there, and they just need some direction".[36]

He concluded that "the important thing is the signposting".[37]

16. Keith Morgan, the British Business Bank's Chief Executive, saw the British Business Bank's role as "catalysing, accelerating and giving additional funding weight to those alternatives and delivering supply that is not there now, and alongside that increasing awareness of those alternative options".[38] He stated that, since its inception, the British Business Bank had "allocated £400 million of investment that will go into alternative lenders".[39] This objective was supported by the Minister, who said that the Bank should be:

    Supporting other providers of finance, whether challenger banks, whether peer to peer finance or whether investment funds and venture capital type funds, rather than directly investing in business, in order to make sure that our finance markets are more mature.[40]

17. The British Business Bank may not be able to change the culture of the traditional banking sector, but it has had success in growing the market for alternative finance. The British Business Bank has a clear role to play in improving the coordination and administration of support for businesses to access alternative finance. The Government should work with the British Business Bank to improve signposting of available support as a matter of priority, developing a menu of alternative finance providers for each different area of financial support.

Enterprise Finance Guarantee

18. The Enterprise Finance Guarantee (EFG), overseen by the British Business Bank, is a guarantee scheme which acts "to facilitate lending to viable businesses that have been turned down for a loan or other form of debt finance due to inadequate security or a proven track record".[41] The British Business Bank explained the scheme's work as follows:

    By providing lenders with a government-backed guarantee for 75 per cent of the value of each individual loan […] the guarantee provides protection to the lender in the event of default by the borrower.[42]

The scheme is therefore aimed at encouraging commercial lenders to make investments, where the risk-profile would have previously prevented businesses access to finance.

19. The Department told us that "£338 million of lending was facilitated by an Enterprise Finance Guarantee" in the 12 months to the end of June 2014. In this period there were "nearly 3000" instances in which the scheme had allowed businesses to obtain loans that would not otherwise have been made.[43] We were pleased to hear that the scheme had had a positive impact in several sectors. For example, Creative England stated that the scheme was "in principle, a great way for small creative businesses to access debt finance for growth".[44]

20. However, Stuart Garner, the CEO of Norton Motorcycles, raised a specific concern about his experience of how the scheme could skew a bank's incentives away from supporting a business to succeed, and toward foreclosure and bankruptcy. This stemmed from the presence of the guarantee meaning that a bank could be sure of recovering 75 per cent of a defaulting loan. He explained that banks and finance companies could make a profit by calling in the loan at the first sign of financial distress because, in an experience with one of his companies, he had found that "claiming back that Government loan at 75 per cent plus what I had already paid made it a significant profit pot, and they could liquidise the loan".[45] As Mr Garner put it, his bank "would not have liquidated me if it did not have the government guarantee".[46] He recommended that, to remove this incentive, the guarantee should be restructured so that the guarantee available to the bank was reduced by a specified amount each year:

    The bank then has exposure to the loan. At the moment, the bank cannot lose. […] By reducing that Government loan by a stepped amount every year, the bank is unable to liquidise that loan and step out, because it gets bought into a loss. That means that it has to stand there and support small businesses, as the small business is liable to the loss itself.[47]

We were also concerned to hear reports about potential EFG mis-selling.[48]

21. While we heard a lot of positive feedback about the Enterprise Finance Guarantee scheme, we were concerned to hear that it included incentives for banks to use the loans as a tool for their liquidity, rather than to help businesses grow. We recommend that the Government takes note of the evidence that we received on this issue and reviews whether the scheme can be improved to prevent such perverse incentives that might see a bank choosing to foreclose a loan, rather than seeking solutions to keep the business concerned afloat. In its response to this Report, the Government should outline what actions it will take to address this issue.

Green Investment Bank

22. The Government is committed to reducing carbon emissions by 80 per cent by 2050.[49] Achieving these reductions requires investment in renewable energy and energy efficiency in order to encourage the UK's transition to a green economy. The total level of such investment over the next ten years has been estimated at approximately £200 billion, with £110 billion required for new low-carbon generating assets and supporting infrastructure alone.[50] Despite the scale of this required investment, the Government has noted that "finance-related market failures continue to limit the scale and pace of investment in green infrastructure projects".[51] These market failures occur because green projects are "perceived to carry higher levels of construction risk" than other projects.[52] In order to help overcome this market failure, the Green Investment Bank was set up to "help mobilise the additional private investment in green infrastructure projects needed if the UK is to meet its environmental objectives.[53]

23. The Green Investment Bank "is a 'for-profit' bank, whose mission is to accelerate the UK's transition to a greener economy, and to create an enduring institution, operating independently of Government".[54] It became operational in November 2012 with an allocation of £3.8 billion funding from Government to March 2016.[55] This funding is used to finance "green projects on commercial terms and mobilise other private sector capital into the UK's green economy".[56] Shaun Kingsbury, Chief Executive of the Green Investment Bank, described its role as follows:

    We take on the difficult projects, getting involved in their development to help them become commercially viable and investable. Our finance and technical expertise helps to de-risk projects for other investors, particularly where the project involves technology or financial innovation. We help to strengthen and build new, emerging sectors of the UK green economy by raising awareness and developing products to provide new commercial, financial solutions. And, we are working to reduce the costs of capital for green infrastructure projects by helping to attract and connect long-term investors to long term, stable, profitable, operating assets, like offshore wind farms.[57]

24. The terms of the Green Investment Bank's State Aid approval from the European Commission specified that projects wishing to be funded by the Green Investment Bank must first prove that they have attempted to obtain funds from commercial lenders.[58] This is to ensure that, wherever possible, finance from the Bank is additional to market lending. The terms of the approval also specified the sectors in which the Bank should operate. This covered three priority sectors: offshore wind; waste; and energy efficiency, with eighty per cent of the value of the Green Investment Bank's investments being directed to these sectors. The Green Investment Bank is also able to invest in five other sectors: biofuels for transport, biomass power, carbon capture and storage, marine energy, and renewable heat.[59] The Green Investment Bank described its terms of reference as follows:

    A transaction must first sit within our permitted sectors, characterised by a market failure in the availability of finance; primarily offshore wind, waste and bioenergy and energy efficiency. We must be additional, meaning that our support of a transaction must fill a gap; crowding-in and not crowding-out other capital. And we must invest on terms equivalent to and not any better than would be provided by the market.[60]

25. We received positive feedback about the work of the Green Investment Bank in its first two years of operations. For example, Nick Molho, Executive Director at Aldersgate Group, told us that the Green Investment Bank had had "a very positive role in the sector", maintaining cross-party support whilst managing "to leverage just over £5 billion of investment in more than 30 green infrastructure projects" since it had commenced operations.[61] In the financial years 2012-13 and 2013-14, the Green Investment Bank invested £1.3 billion across the UK, attracting up to £4.8 billion in private investment.[62] Table 1 summarises the Green Investment Bank's activity in terms of capital committed and projects supported.[63] Figure 1 shows how these investments have been deployed across the Green Investment Bank's priority sectors.[64] The Secretary of State described the Bank's work so far as follows:

    The [Green Investment] Bank's current investments have supported 3,500 jobs in the UK's growing green economy and will cut CO2 emissions equivalent to taking over half the cars off London's roads. Green Investment Bank's plans for a dedicated offshore wind fund are a real boost for our industrial strategy in a sector where we have a strong competitive advantage compared to other countries. There are great opportunities for British companies and the industry has the potential to create 30,000 jobs for the UK.[65]
Table 1: Performance measurement of the Green Investment Bank[66]

Figure 1: Green Investment Bank investment in priority sectors[67]

26. Despite this positive start, there were concerns about both the Green Investment Bank's future development and the overall levels of green investment in the UK.[68] The Green Investment Bank was allocated £3.8 billion to March 2016. We heard that the Green Investment Bank would need borrowing powers to stabilise its operations after that date. This would facilitate a higher overall level of green investment. For example, the Aldersgate Group argued that borrowing powers were needed "urgently" and that "the timescale on which this will be allowed still needs urgent clarification for the [Green Investment Bank] to reach its full potential".[69] Nick Molho, Executive Director at the Aldersgate Group, told us that there was a strong economic case for giving the Bank greater borrowing powers, especially since "the bank has proven its competence".[70] He went on to explain this requirement as follows:

    When you look at the scale of decarbonisation that we are expecting the UK economy to deliver over the next 15 to 20 years, we are broadly looking at a tenfold reduction in carbon intensity. That is going to require a Green Investment Bank with greater financial firepower if it is going to be able to play a meaningful role in this transition.[71]

When it came to supporting offshore wind in particular, Dr Gordon Edge, Director of Policy at Renewables UK, reiterated this point, telling us that the Green Investment Bank "can only do more if it has more", [72] and:

    We are seeing a pipeline of projects lining up and needing finance across the board. We are seeing a number of banks and some institutions that are kind of at the edge, but there are not enough of them really to bring forward the level of investment that we need. Having the [Green Investment] Bank there with extra firepower can give us the push now, and if we get that push now, we can start establishing an industry in the UK. If we hold back, we might lose the opportunity. […] We have several billion pounds a year of investment that will be needed in the very near future, so I think it is highly necessary.[73]

27. Shaun Kingsbury, Chief Executive of the Green Investment Bank, told us that it would "need borrowing powers in the next Parliament, for sure" but the absence of such powers "has not held us back to date".[74] He noted that, in terms of the Green Investment Bank's current work, "the restriction is not the availability of our capital, but finding bankable projects ready for final investment decisions".[75] We also heard that the Green Investment Bank had recently expanded into support for community-scale renewables,[76] but the process of state aid clearance to enable this work had been time-consuming.[77]

28. The Budget in 2011 stated that the Government would enable the Green Investment Bank to have borrowing powers "once the target for debt to be falling as a percentage of Gross Domestic Product (GDP) has been met".[78] The date envisaged for this condition to be met in Budget 2011 was 2015-16.[79] When giving evidence to us, the Minister told us that the Green Investment Bank was "performing well",[80] that he had "an open mind" on borrowing powers and was "looking to see" how the Green Investment Bank could expand its work.[81] During our inquiry, the Prime Minister told the Liaison Committee that the Green Investment Bank had made a "very good start" and he wanted "it to start borrowing as we see our deficit and debt situation ease".[82]

29. The Green Investment Bank has an important role in supporting the businesses that will drive the UK's transition to a low carbon economy. In order to ensure the continued effectiveness of its work, and to help bridge the current gap in overall levels of green investment, the Green Investment Bank will need borrowing powers. It is welcome that the Government recognises the potential utility of such additional powers. But the delay in coming to a decision on their introduction has been unhelpful. We recommend that the Government sets out plans to create borrowing powers for the Green Investment Bank in 2015-16. In its response to this Report, the Government should set out the steps necessary to introduce these powers, with an assessment of how long each step would take, so that action can be taken on this issue early in the next Parliament.

12   Department for Business, Innovation and Skills, Boosting finance options for Business (March 2012), p 10 Back

13   Department for Business, Innovation and Skills, 'New business bank to support up to £10 billion of business lending', accessed 4 February 2015 Back

14   BBC News, 'Cable promises £1bn business bank', accessed 4 February 2015 Back

15   Department for Business, Innovation and Skills, Building the Business Bank, BIS/13/734, March 2013, p 4 Back

16   British Business Bank, 'What we do', accessed 4 February 2015 Back

17   British Business Bank, 'What we do', accessed 4 February 2015 Back

18   HC Deb, 21 March 2013, col 49WS Back

19   Federation of Small Businesses (GSB 18) para 6.1 Back

20   Federation of Small Businesses (GSB 18) para 6.1 Back

21   Federation of Small Businesses (GSB 18) para 6.2 Back

22   British Bankers' Association (GSB 17) para 2.1 Back

23   Q181 Back

24   Q43 Back

25   Q224 [Mr Morgan] Back

26   Q224 [Mr Morgan] Back

27   Q220 Back

28   Q29 Back

29   Q172 Back

30   Q162 Back

31   More information may be found here, accessed 4 February 2015 Back

32   Q162 Back

33   Q259 Back

34   Q165 Back

35   Q172 Back

36   Q214 [Mr D'Ammassa] Back

37   Q214 [Mr D'Ammassa] Back

38   Q221 Back

39   Q221 Back

40   Q347 Back

41   British Business Bank, 'Understanding the Enterprise Finance Guarantee', accessed 4 February 2015 Back

42   British Business Bank, 'Understanding the Enterprise Finance Guarantee', accessed 4 February 2015 Back

43   Department for Business, Innovation and Skills (GSB 22) para 10.11 Back

44   Creative England Limited (GSB 20) para 8.0 Back

45   Q166 Back

46   Q166 Back

47   Q166 Back

48   RBS probes claims of mis-selling EFG scheme loans,, 15 January 2015 Back

49   Climate Change Act 2008, section 1 Back

50   Environmental Audit Committee, Twelfth Report of Session 2013-14, Green Finance, HC 191, para 10 Back

51   Department for Business, Innovation and Skills (GSB 22) para 11.1 Back

52   The Impact Assessment accompanying the establishment of the Green Investment Bank stated that there are "a number of market failures and barriers that manifest in financial markets and constrain the supply of finance, including: financial market capacity constraints, risk aversion due to imperfect information and information asymmetries, positive spill-overs in knowledge, high financing transaction costs and coordination problems. There are also government failures which induce policy uncertainty", accessed 4 February 2015 Back

53   Department for Business, Innovation and Skills (GSB 22) para 11.2 Back

54   Green Investment Bank, 2013-14 Results (June 2014), p 1 Back

55   Department for Business, Innovation and Skills (GSB 22) para 11.3 Back

56   Green Investment Bank, Annual Report 2014 (June 2014), p 4 Back

57   Green Investment Bank, Annual Report 2014 (June 2014) p 8 Back

58   Using taxpayer-funded resources to provide assistance to one or more organisations in a way that gives an advantage over others may be state aid. Some state aid is illegal under EU rules because it distorts competition. However, where it is unavoidable, state aid can be given legally by using one of a set of approved EU mechanisms for state aid or by getting approval for the particular scheme from the EU Commission. Back

59   Green Investment Bank, Standard Note SN05977, House of Commons Library, June 2014 Back

60   Green Investment Bank, Annual Report 2014 (June 2014), p 27 Back

61   Q142 Back

62   Green Investment Bank, Annual Report 2014 (June 2014), p 4 Back

63   Green Investment Bank, Strategic Report 2014 (June 2014), p 27 Back

64   Green Investment Bank, Strategic Report 2014 (June 2014) Back

65   Green Investment Bank, 2013-14 Results (June 2014), p 2 Back

66   Green Investment Bank, Strategic Report 2014 (June 2014), p 27 Back

67   Green Investment Bank, Strategic Report 2014 (June 2014) Back

68   For example: Q142, Q145 & Q146 Back

69   Aldersgate Group, Two years of the Green Investment Bank: What next? (October 2014), p 18 Back

70   Q151 [Mr Molho] Back

71   Q150 Back

72   Q154 [Dr Edge] Back

73   Q153 Back

74   Q227 Back

75   Q228 Back

76   Q231 Back

77   Q223 Back

78   HM Treasury, Budget 2011, HC 836, March 201, para 1.112 Back

79   HM Treasury, Budget 2011, HC 836, March 201, para 1.112 Back

80   Q358 Back

81   Q360 & Q358 Back

82   Oral evidence taken before the Liaison Committee on 16 December 2014, HC (2014-15) 887, Q14 & Q16 Back

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Prepared 24 February 2015