Savers frustrated by years of weak returns should be linked with credit-hungry medium-sized businesses to help solve Britain’s broken funding market, the CBI says.
The business group is lobbying for the creation of tax-efficient investment trusts that would allow private investors to support smaller companies struggling to secure long-term funding.
The plan could unlock £7.4 billion while providing an attractive option for investors, according to a report published by the CBI and BDO, the accountants.
Proposed long-term lending trusts would be similar to existing venture capital trusts, listed investment vehicles that back smaller companies. VCTs also provide tax relief on investments, but they invest both debt and equity and tend to be used mainly by sophisticated investors.
The performance of VCTs has been mixed. However, BDO and the CBI said a version of them that only provided long-term loans to mid-sized companies would provide a more predictable performance, making them more suitable for retail investors.
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Long-term lending trusts could provide “relatively high returns while offering a relatively high degree of protection — given that the [trust] would be run by an investment professional”, they said. The proposal is aimed at companies with sales between £10 million and £100 million.
Despite modest improvements in the lending market, about half of mid-sized businesses are still struggling to obtain loans of more than five years, partly because tougher rules on banks have made it increasingly unprofitable for them to lend over longer periods, the CBI said.
John Cridland, CBI director-general, said that the government had a responsibility to fix the “broken funding ladder” to help mid-sized businesses to realise their potential.
“[Encouraging] savers to invest in our businesses is a marriage made in heaven. It offers them attractive, alternative investment packages, while helping propel medium-sized businesses along their growth path, boosting the economy as a whole and enhancing productivity. The sweet spot for economic growth is in the mid-market.”
The long-term lending trusts would offer a fixed return over a period of at least five years, as well as income tax relief, the CBI suggested. The tax breaks could either be on savings income, like an ISA, or with a deduction from income tax in the year of investment. The proposal would cost the taxpayer an estimated £300 million a year.
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John Gilligan, a partner at BDO, said the plan could boost competition in a market dominated by a handful of high street banks. The CBI and BDO are expected to lobby the Treasury to announce the plan with the chancellor’s autumn statement.
Since long-term lending trusts could be managed by the same firms that already run VCTs, red tape could be kept to a minimum, the report argues. The plan would create an option for retail investors, including the retired, seeking an investment “with risks and rewards between the low yields of gilts and the higher rewards of equity”.