The relationship between banking and small business financing is not a healthy one.  Recently this has become more extreme as media attention increasingly focuses on the failures of high street banks in the lending stakes. Now we see banks, non-banks and politicians alike entering the fore in a bid to support small businesses. But given current economic turmoil how can banks and Government work together on this problem and what alternative channels are available via new financial players?

A number of recent Government attempts have failed to make a noticeable impact. Collaborative attempts between Government and banks to support small business financing began with the now defunct Project Merlin, which missed its target by a whopping £1bn. The National Loan Guarantee Scheme (NLGS) is also now officially winding down after just six months of operation, following the launch of the Funding for Lending Scheme (FLS). Whilst the past month has seen the number of UK lenders participating in the FLS more than double, the value of outstanding loans which are eligible for low-cost funding has barely increased – the total value of loans covered by the scheme has risen from £1.2tn to just £1.3tn.

These lukewarm campaigns suggest that the time has come for the Government to consider alternative channels for distributing funds and recognise the roles alternative financial service providers can play to support small business cash flow.  Last week John Griffiths Jones, former KPMG boss, said that the current growth of challenger banks isn’t the solution to the shortage of lending to small firms. Given the fantastic innovations coming out of New Finance companies, it seems to me to be a missed trick to view potential support to small businesses purely in terms of lending.  For example, new payments technologies allow small businesses the opportunity to reduce banking costs, while also presenting a brand new distribution channel for Government to drive funding back into British businesses.

The latest announcement from the Coalition on this subject is that of Cable’s Government-backed Business Bank. A notable strength of this latest proposition is the opportunity this provides for these new and innovative players to work with the Government and traditional banks in order to open up fresh distribution channels and drive a quicker economic recovery.

While I applaud all Government attempts to support and build British small businesses, it could now be that traditional banks should no longer be the focal point of such campaigns. British businesses need financial support and the host of new and alternative financial providers are perfectly placed to offer this.