The majority of small business owners today share a common frustration, which is the stranglehold of the banks or worse yet – the lack of funding from financial institutions. A new bond alternative to small business financial lending from banks is being looked at in the UK, and it could be a fantastic idea here in the United States. The Obama Administration has been trying of late to stimulate the small business industry by lending to small financial institutions and banks. The purpose is to make funds more available to the small business owner.
But what if the US government cut out the middleman – the banks, and provided bonds? Would this new approach curb the problem of greedy lending institutions hording bailout money? Perhaps keeping an eye out on what’s happening in the UK will give an indication on whether providing bonds for small businesses will work or not. – Small Business Advice For Today’s Economy!
By James Hurley - 7:30AM BST 19 Jul 2011
The idea will be suggested by Conservative MP Sam Gyimah, a former investment banker and recruitment entrepreneur, who is leading a joint initiative with business and innovation think tank NESTA, which he said will produce “evidence-based, thoroughly worked through proposals” to present to the Treasury to improve access to finance for growing companies.
Mr Gyimah said a retail bond market would create competition for small companies’ debt at a time when banks are adopting a “take it or leave it approach” to lending. Research published last week revealed that banks’ loan rejection rates have rocketed sevenfold since before the financial crisis.
A small firms’ bond market would also produce a new asset class for both retail and institutional investors, he said. Individual firms’ bond issues would probably need to be ‘rolled up’ with other companies of a similar profile so investors’ risk is diversified, Mr Gyimah added.
“Investors could participate in a basket of a certain profile – established businesses in the North of England for example.”
He conceded a “number of questions and challenges” would need to be answered and overcome to make such a proposal realistic.
“You’d need a trading platform with transparent prices and a way to rate the risks of the investments, which would be one of the biggest challenges. And what is the cost to the Treasury?”
Mr Gyimah, MP for East Surrey, said the bond proposal was just one idea that would be examined and the consultation would consider “many possible solutions”, including lobbying for tax efficient EIS investments to be applicable for debt as well as equity.
“There was a time when we didn’t have 3i and widespread venture capital and AIM wasn’t started until 1995,” he said.
“A new wave of financial innovation could come out of the financial crisis.”
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