Bank bosses plan £1.5bn fund to help small firms

BUSINESS leaders gave a cautious welcome last night to plans for a £1.5 billion fund to pump money into cash-strapped companies in return for equity stakes.

• The banks' model will be similar to that used on BBC's Dragon's Den

The British Chambers of Commerce (BCC) said the proposed Business Growth Fund - which was drawn up by senior figures from the UK's six biggest banks - would be welcomed by the "minority" of firms looking for equity investment. And the CBI said the fund would make a "helpful contribution" to the financing of smaller firms.

The new venture will target firms with a turnover of between 10 million and 100m that need some 2m to 10m in funding.

The 10m threshold is lower than the 20m purported last week when early details of the proposals were first mooted - a relief to many smaller Scottish firms that might have missed out on the initiative.

Using a model that mirrors BBC television show Dragons' Den, the banks will effectively own a stake in any companies in which the fund invests.

The group of lenders behind the scheme, co-ordinated by the British Bankers Association (BBA), was set up to investigate concerns that banks are not providing sufficient support to viable businesses.

Senior personnel at the six banks - Lloyds, Royal Bank of Scotland, HSBC, Barclays, Santander and Standard Chartered - have drawn up 17 proposals, most notably the growth fund.

The recommendations, which include setting up a network of business mentors to offer free advice to small businesses and a more "transparent" appeals process for firms denied lending, were presented to Chancellor George Osborne and Business Secretary Vince Cable.

An independent board, including bank and UK government representatives, would operate the fund, which could start investing by April. The new fund, which is subject to formal approval from the banks' boards and the Financial Services Authority, has been likened to 3i Group, a private equity firm formed as the Industrial and Commercial Finance Corporation in 1945 by the major UK banks to provide funding for small enterprises.

Banks have blamed the fall in lending to small firms on businesses choosing to borrow less in response to the weak economy. Angela Knight, BBA chief executive, said the gap in business lending was a result of the financial crisis and recession pulling the banking industry and business community apart.

David Frost, BCC director-general, said: "The proposed Business Growth Fund will be welcomed by the minority of SME businesses seeking equity investment.

"But many businesses are not seeking equity investment - so the improvement of lending processes and business-bank relationships must be the focus of any reform effort."

Matthew Fell, CBI director of competitive markets, said: "The fund will make a helpful contribution to the financing of small companies. It is the sort of scheme that we have been calling for."