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How will the Business Bank Work?

Vince Cable recently announced the government’s plans to create a new Business Bank aimed solely at improving the lending situation for the nation’s businesses. Whereas conventional banks are making their lending requirements all the more stringent, this business bank will be looking to help businesses who find it hard to access funding. It will have £1bn funding behind it, so how exactly will this new government institution work?

The government’s Business Bank won’t have branches in the high street and it won’t be able to help those needing cash management services, overdrafts, term loans or invoice discounting – these are the functions of normal banks but won’t be covered by this new institution. What it will do isn’t a simple answer – this new institution will be a ‘Development Bank’ and will work behind the scenes with high street banks to help them to help SMEs.

It will act as a wholesale bank and will ensure that banks have enough money to lend to small and medium businesses. Since the financial crisis, banks have been less willing to lend to one another, one of the ways in which they raise money to lend on to their customers. This is where the business bank will come in. It will lend to the banks to enable them to loan more to SMEs.

There’s more to it than that, as clearly the £1bn would soon run out unless the Business Bank is able to buy up portfolios of SME loans to enable banks to recycle their money more quickly and provide greater lending to firms. The details aren’t all out yet, so it’s just a case of waiting until the Autumn Statement in December so see exactly how this new government scheme will benefit the small businesses of the UK.

 

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