1st August 2012

Today, the U.K. Treasury will roll out a new stimulus plan to channel billions of pounds to credit-deprived households and small businesses.

The new initiative-called the Funding for Lending Scheme, or FLS, will be open for the next 18 months and will supersede the National Loan Guarantee Scheme, or NLGS,  which was launched just six months ago to provide credit to small businesses.

George Osborne, Chancellor of the Exchequer said on the HM Treasury website that: "The NLGS has made a real difference, with over 16,000 cheaper loans worth over £2.5bn already offered to businesses across the UK. In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work.

"The more generous FLS has officially opened for business and will in time effectively take over from the NLGS, delivering credit easing to the whole economy." 

So how will the scheme work? Courtsey of the BBC, here's what you need to know:

Interestingly, even though the scheme has only been unveiled today, in the past couple of weeks some of the UK's biggest banks – NatWest, HSBC and Santander – have already cut their mortgage rates to below 3% for new, five-year, fixed-rate deals.

Ray Boulger of mortgage brokers John Charcol said: "It is already clear that, in stark contrast to Project Merlin [under which the National Loan Guarantee Scheme was introduced], the Funding for Lending Scheme is very quickly proving effective as far as the mortgage market is concerned."

Nevertheless, according to Gemma Harle, the Managing Director of Tenetlime, the schemes impact on new lending may disappoint unless the Bank of England tackles capital ratios further.

"The banks maintain that regulators are to blame for a credit famine that has seen small business lending continually fall from 2009.Whether this is wholly true or not, the fact remains that if the banks are labouring under the impression that they are under pressure to de-risk rather than lend, which they are, credit availability will continue to be a problem."

"Equally, if there is genuinely no appetite for borrowing as businesses and individuals deleverage, cheap funding will make little difference."

Likewise, John Walker, national chairman of the Federation of Small Businesses, said it remained to be seen how successful the new Funding for Lending scheme would be, especially for small businesses.

"The main objective for any government-backed scheme should be to ensure that the finance actually gets through to small firms," he said.

"Four in 10 small firms were refused [bank credit] in the second quarter and this needs to change if the economy is to grow.

"Communication will be key – whatever the name of the scheme – to ensure that businesses actually benefit from it."


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