The British Business Bank's role in facilitating economic growth by addressing imperfections in SME finance markets

Abstract

This paper presents an overview of the establishment of the British Business Bank; a new government owned financial institution designed to change the structure of finance markets for smaller businesses, so that these markets work more effectively. The paper focuses on explaining the economic rationale for the Bank by identifying how business access to external finance can affect economic growth through facilitating increases in business investment and productivity. The paper provides an overview of recent cyclical trends in SME debt and equity markets, before identifying a number of specific structural market failures affecting different types of finance that prevents some viable SMEs from raising the finance they need. The paper then provides a description of how British Business Bank funding solutions can help to address these market failures.

Keywords::

• British Business Bank
• small business finance policy
• finance gap
• SME growth
• investment
• bank finance
• Venture Capital

Acknowledgements

I would like to thank my British Business Bank colleagues for their ongoing discussions on SME finance related issues. In particular, I would like to thank Krupa Kothari for her comments on co-ordination failures and Ian Connatty for his applied insights into workings of the VC market. Finally, I would like to thank Rob Baldock and two anonymous referees for their helpful comments on an earlier draft of this paper. All errors remain my own. The views expressed in this paper are those of the author alone and do not necessarily reflect the views of the British Business Bank or UK Government.