Funding of small start up businesses
I came across an article in Financial Times discussing about the issue with banks lending money to small start up businesses. Since the financial crash in 2008, small companies have been struggling to get funding from the bank for their growing businesses because it is much more unsteady than funding a bigger and already successful company. Obviously, banks are being more careful with the lending but what about the economical situation when it is already very difficult to start up a new business. How is it supposed to get better when we are just feeding the situation for the worse? For example, most businesses in Finland are really small. We have loads of entrepreneurs, which is good but when it is getting too hard to start up a new business, people won’t do it anymore even if they would like so. Also high taxes put entrepreneurs into a tricky position. Good example would be hairdressers. Over 1500 hair salons have shut down their businesses during the past year because the business is not profitable enough.
So now UK has announced a launch for a new idea to encourage bank lending to small companies by removing some of the risk associated with these borrowers with a government-backed scheme. This means that the government-run Bank will offer to share the risk of certain losses with the banks giving the loans to small and medium-sized companies. The idea is great if it will really excite especially smaller banks towards lending for small and medium-sized companies. And like Mr Van der Lem says in the article “It is a government-backed guarantee in a novel way and for all banks participating it will make their lending more capital efficient, it has potential to move the dial.” Which means, if banks want it to work they really have to participate. It would also give people the chance to start a new business when nowadays a great idea can easily get grounded when we cannot even think about funding it. And this is not only good thing for the new businesses but also for the banks finance when thinking long term, which is why they should really consider taking part of it even though it has its risks.
In my opinion we really need schemes like this in Finland too, or actually in EU in general. The economic situation hasn’t fully recovered from the worldwide crash in 2008 and we still need to work a lot to make it better. But with little things at a time, step-by-step, I believe we can achieve a better financial stability.