Gerry Hoare, founder of Deal Bureau, has said that a more effective means for the government to get funds to cash-starved SMEs would be through a mix of asset-based lending and mezzanine finance. His comment on Posen's proposal is below.

"I read with interest the recent article on Adam Posen's recommendation for setting up a state bank. Having been in banking and SME lending for 30 years, it is an area I understand well and have considerable experience of.

"However, it seems to me the government and its advisers are missing the simple solution and obvious pitfalls, which is why the current banks aren't lending more. Even with support from the FSA and Bank of England, setting up a full bank would take a considerable time and resource of people, not to mention systems.

"I set my business up three years ago to focus on finding debt and equity for SMEs as, given my experience of the last recession; I thought it would be a tough few years for SMEs to raise finance. However, with low interest rates and the banks drip-feeding cash to try and keep businesses going and avoid taking bigger losses than they already have, by writing off a debt, there has been less work than I would have expected. This is supported by the insolvency sector having to make people redundant, having geared up for a raft of insolvency work that as yet hasn't materialised.

"However, there are still a number of distressed companies trying to refinance to avoid being placed into administration or suffering a debt-for-equity swap with a bank. Many of these companies cannot get funding from any other bank, even if they can prove they can service the debt, because many banks are worried about taking on another bank's problem.

"Businesses that are performing well are struggling to raise funding because the banks want significant amounts of tangible security. Many SME owners have seen a reduction in their personal wealth and cannot meet the criteria, often the net worth of their company has reduced over the last couple of years, again making them a poor risk. The banks don't want to lend to anyone where they believe it could be a high work load or cause them to suffer a loss. Aside from the fact they are still working through their current problems.

"Therefore, there is a dilemma and whilst the government can say the banks are lending in many cases, the banks' perception is they are taking on difficult businesses which will involve high levels of monitoring, costs and capital, together with possible losses which they don't want to lend. Larger businesses are easier to analyse, often have significant net worth and greater market share making them attractive to the banks, however many of these businesses don’t need the facilities.

"I believe the printing sector has been particularly hit by the banks' perception that printers are a poor credit risk. Their view is it is capital intensive, very low margin with significant over capacity and not always well run. In reality many printers have excellent systems and controls; I have seen printers adopting LEAN procedures long before the banks looked at them. Yes they are capital intensive, but these can be financed and don’t need to be changed as often as they used to. Margin pressure is being seen in all sectors, retail has had its difficulties. Whilst there is over capacity some of that can be managed. I believe many bankers are concerned that as the economy continues to stagnate, that will impact of the printing sector further, as companies either cut back on print spending or companies cease to trade who have previously purchased from the sector.

"The question then is, how do we get more funds into the troubled companies securely, so that should they fail, we could recover the loan and the government not suffer losses and for growing businesses, how do you support that growth.

"The Enterprise Finance Guarantee (EFG) scheme is very difficult to source funds from, as is the mezzanine scheme.

"If the government wants to lend, they have a regional network of investment funds, so why don't they set up asset-based lending (ABL) companies? Aside from the need to cover anti-money laundering, it is unregulated; software is readily available and considerably cheaper than a full banking system, and a good level of staff resources are in the market.

"These ABLs would provide secure working capital facilities for SMEs, easily administered, and could be sold as a business in years to come to a bank once the economy has picked up.

"Should there be businesses that may not necessarily fit in the traditional ABL client then, you could structure the loans as mezzanine finance.

"I changed my business model after three weeks, when I realised I could assist business better by using hedge fund capital to lend to distressed businesses, using ABL structures. All of the hedge funds have had their capital back and made good returns even when two of the companies went into insolvency on these types of deals.

"I have been reading about the government setting up a bank for several months; however, I don't understand why the government can't see it is difficult and expensive unless they don't want to?"