Chancellor unveils plans for 'credit easing' solution to small business lending

Posted by Dan Martin in Finances on Mon, 03/10/2011 - 12:52
grabbing money

George Osborne has revealed plans to introduce new money into the economy and help small businesses through a method known as "credit easing". 

Speaking at the Conservative Party conference in Manchester, the chancellor said: "Everyone knows Britain's small firms are struggling to get credit and banks are weak. So as part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small businesses. It's known as credit easing.

"It's another form of monetary activism. It's similar to the National Loan Guarantee Scheme we talked about in opposition. It could help prevent another credit crunch; provide a real boost to British business; and over time help solve that age old problem in Britain: not enough long-term investment in small business and enterprise."

Blogging on the BBC News website, business editor Robert Peston said credit easing would amount to billions of pounds with the money being used to buy corporate bonds.

"Initially the bonds would be those issued by big companies," Peston added. "And the Treasury would probably only undertake to purchase these bonds in the event of a further worsening in the eurozone's financial crisis that seriously reduced the provision of credit to businesses.
 
"Such bond purchases could, in theory, start almost immediately, via a reactivation of the Bank of England's asset purchase facility - which was created in early 2009 but has barely been used.
 
"In the longer term, the impact of credit easing on the flow of credit to smaller businesses could be more significant - because the Treasury is hoping to encourage the creation of bonds made out of small-business loans, by promising to buy such small-business bonds and thus create a market for them.
 
"The idea is to encourage banks to parcel up small business loans into such bonds."
 
Responding to the announcement, Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, told BusinessZone.co.uk: "I think the idea is one which has been a long time coming and should help SMEs quite considerably.
 
"As long as the banks still conduct their usual credit checks and due diligence prior to the loan being granted then the government (taxpayer) to stand by the loan as the guarantor will offer the opportunity for the SME to offer funding which they otherwise might have been declined and for the taxpayer not to shoulder too many bad debts."
 
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