Government to push for greater use of equity finance

19 July 2010

The government is looking at ways of encouraging business investment that does not rely so extensively on bank debt.

A consultation paper is to be launched by the Treasury and the Business Department which will examine business finance in the UK.

Speaking ahead of the launch, the Business Secretary, Vince Cable said: "The system is still biased towards debt and we need to find ways of getting more equity funding into business, maybe through something like the old 3i, to help growth with tax breaks or tax incentives without it being a way of avoiding paying tax."

The paper is expected to review such alternatives to bank debt as equity and public market instruments like covered bonds.

It will also ask for views on the sort of tax incentives that could be used to encourage private investors to put money into new enterprises, and may also include proposals for regional stock exchanges.

It is well known that the government is keen to promote business funding outside of the high street banking system.

Mark Hoban, the financial secretary to the Treasury, has already pointed out that only 2 per cent of small businesses use equity finance at any one time, describing it as a "missed opportunity for the UK's small businesses".

The Business Secretary also criticised the banks on their business lending record.

Responding to claims by the British Bankers' Association that banks were hitting an 80 per cent target rate of business loan approvals, Mr Cable argued the claims were "misleading".

He said: "I think they are raising the hurdle. All the evidence from business, from the Institute of Directors and other bodies, is that banks are not lending as much as is needed."

Mr Cable has hinted that mandatory action may be taken to force the two semi-nationalised banks, Lloyds and RBS, to lend more to smaller firms.