The introduction of a new British Industry and Enterprise Bond would get credit flowing to small businesses – according to a new report by conservative MP Sam Gyimah and NESTA.

Beyond the Banks, the second report published by the two parties, calls on the chancellor of the exchequer to introduce the bond – among other measures to unlock finance – in Tuesday’s Autumn Statement.

The report argues that establishing a vehicle through which portfolios of business loans could be bought from banks, and bundled into bonds, would free up the banks’ balance sheets to restart lending.

It is suggested that these ‘British Industry and Enterprise Bonds’ could be bought by the Bank of England, before being sold on to investors.

Alternative Investment

The report’s authors further suggest that such an initiative would bring new sources of finance to the market – citing evidence that savers are seeking alternative investment opportunities with decent returns, as traditional avenues fall foul to low interest rates and share prices.

According to NESTA, 70% of the retail and institutional investors it polled would be “fairly” or “very interested” in investing in such bonds.

Increasing competition

Furthermore, the report proposed long-term plans for increasing competition in the lending market – to reduce barriers to entry for new competitors such as peer-to-peer financiers Crowdcube and Funding Circle.

Calling for financial regulations to be updated to increase the diversity of finance available, the report highlighted the relatively higher levels of competition in other EU countries and the US.

Sam Gyimah MP said of the report: “The economic crisis and the…lack of competition in the UK banking sector means that without radical action lending to small businesses will continue to decline and stifle growth.

“Unlocking new pools of capital for investment in British industry can reshape the lending landscape and have the transformational effect on our economy that the privatisations of the 1980s had.”

Stian Westlake, executive director of policy and research at NESTA, added:

“Economic recovery and growth relies on investment in UK businesses. But this continues to be held back by levels of bank lending. These have been persistently low since 2008 and are likely to fall further as the Eurozone crisis deepens. Providing access to new pools of capital is the long-term solution we need to unlock credit to Britain’s small businesses.”

To download the full report, visit the NESTA website