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Will the Chancellor’s SME credit scheme spark sector growth?

It would seem that the government has finally got the message. After a year of calls for improved SME lending facilities, George Osbourne has unveiled a major new small business credit scheme worth a potential £20 billion. So, is this the triumph that the SME sector has waited so long for?
Due for launch in January 2012, the two-year scheme will see the government underwrite SME borrowing by the big banks, a move it envisages will cut the cost of borrowing for small businesses by up to 20% and enable the high-street lenders to offer cheaper SME loans.
The news has been largely welcomed by the SME sector, which is likely to see the move as a victory after a year of sustained campaigning for improved SME lending facilities. It has repeatedly argued that big bank SME lending terms are prohibitive and the new package of measures will certainly put to the test the argument presented by the banks that a lack of demand is behind subdued small business lending levels.
The SME credit scheme, which also includes proposals to create a bond market for the small business lending sector and a public/private sector investment fund, also puts a question mark against the future of Project Merlin, or at least its annual small business lending targets.
Another point worth making is that the small business lending landscape has changed markedly over the last 12 months. Alternative SME finance has grown notably, in particular invoice finance and factoring, led by new SME credit facilities such as select invoice discounting.
So, is the new SME credit scheme an early Christmas present for small businesses? Potentially. But, looking ahead, SME sector growth may be underpinned by two pillars – big bank small business lending and alternative SME lending products such as invoice discounting.
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