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]
TRADITIONAL FINANCE MARKETS
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.
ALTERNATIVE FINANCE
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, www.ft.com,
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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