Wednesday, 12 December 2012

Government to lend to sub-prime business direct

Vince Cable demonstrates his knowledge
of Lending and Finance
As we get towards the time of the year where people start making their annual predictions about the future. , here is an easy gimme for them all. The Government has announced that it is to lend money through peer to peer funding websites like Funding Circle.

Now Funding Circle provides an interesting new market for people to lend directly to small business, a sort of entry access VC business for retail punters. It is still quite new in that it was formed in 2010 - so loans over 3 or 5 years have not yet reached maturity meaning that the low default rate being marketed is to be expected. On the plus side, starting in 2010 means that business founded then or looking for finance were doing so in a recessionary environment so hopefully had well founded business plans.

However, it won't always be the case and some of the big lends will go belly up  - then we will find out if Funding Circle can cope in a way that a larger institution can. Who remembers the Lloyds names disaster of the 1980's - I see many parallels here and the cry of something must be done to help these small investors who have risked their money way will be very voluble.More so if they then can say they have lent into Government backed loans.....

Why though is the Government getting so heavily into picking winners? Why with money directly - we are all paying taxes only to see the Government give them to Private companies to lend out again. Surely much more efficient would be tax breaks for lending to Funding Circle or tax breaks and incentives for investing full stop. The Government hate these schemes because there-in lies the kind of Jimmy Carr type tax evasion. It can't trust us so feels it must take our money and distribute it as it sees fit.

In addition, I am not a big fan of big debts being run up by small ventures. Money yes, but there is this thing called Equity. Equity is better for the long-term as you get a better reward from a business - debt is something to be reneged upon. Plus of course debt  comes with interest payments and cash flow at small businesses is the be all and end off of everything. How well did it all work out when we decided in the 2000's to load everything in sight up with leveraged debt - ah yes, our ten year recession.

So this is wrong on at least 3 levels, one in creating a new market that the private sector is already serving thereby interfering unnecessarily (not that the CEO of Funding Circle will agree, he's pulled a blinder), secondly but overcomplicating something by handing out money rather than incentivising through the tax system which is far cheaper and finally by encouraging debt into smaller businesses, in obliviance to our very recent lessons on this issue.

Who is championing all of this - why Vince Cable of course!

13 comments:

Graeme said...

Are we going back to the future? Surely someone in government must remember the 70s and those wonderful schemes such as FFI, ICFC, etc etc.

Demetrius said...

Since when did the government pick winners? To introduce a complex subject such as track record may be too much for civil servants but far too much for politicians. Also recent "community" funding by Labour strangely went to a lot of organisations etc. which were run by Labour councillors. Not for profit, but wow the expenses and consultative fees.

hovis said...

"In addition, I am not a big fan of big debts being run up by small ventures. Money yes, but there is this thing called Equity. Equity is better for the long-term as you get a better reward from a business"

Interesting you say that have you ever read Felix Dennis and how he would only give up equity practically only pain of death?

Budgie said...

I really don't like the government picking winners, especially getting involved itself in business, whether banking or otherwise.

It is of course a fact that the government is involved more directly in some aspects of the economy than others. Indeed it should have a strategic and supervisory role. But it neglects sensible strategic planning, whilst at the same time wasting everybody's time with micro-managing. And Vince Cable is a prime example.

Blue Eyes said...

Wouldn't it be better to spend the same money on roads or tax cuts? Especially as St Vince keeps banging on about the problem being "on the demand side".

I sat across the carriage on the Tube the other day from a woman who was proudly telling her mother (?) that she was Vince's speech-writer. Supercilious twit.

CityUnslicker said...

Graeme - the only ones who remember clearly thought they were a good idea...

Demetrious - Quite, money for lib dems in lib dem constiuencies - another aspect of the scandal to come.

Hovis - I did not say equity should be cheap; but running up big debts on small and inconsistent cash flows is a recipe for disaster. Once n a stable footing, debt is a better option.

Budgie - interefernece means more jobs for the bureaucrats, hence its attraction. Someone will now oversee these Zopa loans, so a new public sector job has emerged from the gloom.

BE - You did well to restrain yourself! Of course it should be tax cuts, but we have corporastits in charge.


Anonymous said...

Blue Eyes.

Your exclamation 'Twit' seems to contain a typo

Anonymous said...

A small price to pay to breakup the cosy cartel of the banksters and their 'vampire squid' business model.

This is the financial equivalent of stockpiling coal so the miners could be broken on the wheel. Banksters, the new 'enemy within', deserve nothing less for wrecking jobs, communities and industries while trousering ££ billions.

Graeme said...

anonymous - the miners did their best to bankrupt us, along with their pals on the railways, power workers, dockyards, postal services etc. Thankfully we got a government to stand up to the idiots.

Budgie said...

Anon 6:44, most of the people who work in banking from bottom to top are not "banksters" whatever that means. Those bankers that did take us for a ride were either themselves taken for a ride by Gordon Brown or were working hand-in-glove with him.

To blame only "banksters" and worse imply that all bankers were rotten from top to bottom, whilst excluding anyone else from blame is not just wrong, but makes it likely we will make the same mistakes again, even if in other industries.

Some bankers were to blame, and some should be in jail. But the man who boasted over and over of his genius and total command of the economy, including the banks, cannot escape blame. Gordon Brown was the prime culprit.

hovis said...

Budgie, indeed -I'd personally go further down the road to the fact that itis the central banking cartel and BIS that created the conditions while goverment regulators encouraged from the sidelines the venality and corruption in the higher profile parts of the financila sector.

Jan said...

I was thinking of a small investment in Funding Circle but I shan't bother if the government are getting involved. That is the kiss of death.

jack loach said...



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