October 17 2011.

The Forum of Private Business has given a cautious welcome to a new bank launched this week promising to lend £250 million per year exclusively to small businesses.

However, the not-for-profit business support organisation is calling for steps to improve traditional small business relationship banking in parallel to the asset-based lending provided by Shawbrook.

The Forum believes more competition between leading banks and allowing alternative funders to compete in the finance markets they dominate - including via substantial tax breaks for private lenders - would help to address the perception of small businesses as risky propositions and subsequently bring down lending costs.

Shawbrook Bank - a subsidiary of RBS Equity Finance - began trading with the claim customers will be able to borrow at genuinely competitive rates, and in most cases have a definitive answer within 24 hours on whether their loan application has been successful. Businesses will not even need to hold a current account with the bank to access its services.

While the Forum believes the development is potentially good news for some small businesses struggling to access affordable finance, the new bank alone will not solve the lending problems they face.

"The bank represents a new source of finance for small firms and that is certainly a positive development," said the Forum's Campaigns Manager Jane Bennett. "But it has to be put into perspective. Shawbrook's model is lending against the value of a property, a form of asset finance rather than a return to the strong relationship banking that we want to be the bedrock of commercial finance in the UK. While a target of lending £250 million per year is not huge, the funding that will be available via the new bank should not be dismissed out of hand. However, there is a great deal of work still to be done to improve competition in order address the over-centralised, tick-box nature of today's banking system, and to restore local decision making powers to branch managers who truly know the businesses in their areas. Providing better relationship banking is how to ease the punitive risk criteria we have seen in recent years, and subsequently bring down lending costs."

A recent study from the Bank of England predicted lending costs for most SMEs are set to rise, particularly for firms with an annual turnover below one million pounds. Conversely, the bank said larger firms with a turnover exceeding £25m may see borrowing costs fall.

The Campaign for Community Banking Service's (CCBS's) Derek French agreed that £250 million per year is relatively small a sum, but conceded that the new bank is a step in the right direction for small businesses. "You have to welcome any new service in finance for small business these days, but it's essentially asset finance. It's going to be leant against property, so they won't be taking a punt on any business," he said. £250 million sounds a lot, but in comparison to the other banks who are lending billions, which the government says is still not enough, it's pocket money, but every bit of pocket money helps. I'm not too excited about it really, it's certainly not going to make up for the problems in mainstream banking, but in this climate you have to welcome any new player to the market."

Mr French was also skeptical about Shawbroook's claim that most credit applications would be turned around in 24 hours. "It's a bit like in the personal banking sector if you go to get a mortgage. You get a 'yes' and come out waving a letter, but it's subject to a valuation and proof of your earnings. You may have got the 'yes', but they are conditions that take longer than 24 hours to arrange."

The Forum is calling for better banking services and more competition within finance markets as part of its Get Britain Trading campaign. The campaign aims to raise awareness of the contribution of small firms to the UK's economy and remove the barriers to starting and growing a business.

For more information email getbritaintrading@fpb.org visit www.fpb.org  or call 0845 612 6266.