SME Lending

SME Lending On the Up – If Your Business Face Fits

An annual survey has shown that although lending to SMEs in the UK is increasing for the first time since the recession, the southeast is still getting the bulk of investment, while the smallest and youngest businesses still struggle to get finance.

Finance Sources and Distribution

The Small Business Finance Markets Report from the British Business Bank revealed increased availability of bank debt and a rise private equity and peer-to-peer finance for SMEs.

Much of the investment from banks, which still account for over 80% of business lending, went to medium-sized businesses rather than smaller companies. Those businesses less than five years old experienced a 50% rejection rate from the banks. Keith Morgan, chief executive of the British Business Bank, said it’s important that businesses know about all the finance options available.

“Whilst levels of awareness have improved, in particular for newer types of finance, it is striking that over half of UK smaller businesses still go only to their main bank and do not shop around for finance,” he said in his introduction to the report. “We will therefore continue to work with our partners to promote the successful ‘Business Finance Guide’, an excellent resource for financing options, and will finalise our advice to HM Treasury on the designation of new finance platforms, through which smaller businesses declined facilities by their banks will be referred to alternative providers who may be able to help.”

However, the alternative finance sector, which includes peer-to-peer lending, grew dramatically, increasing by 75% to £1.26bn, and equity fund investment in smaller businesses rose 43% partly driven by government tax incentives – although 71% of equity funds went to businesses in London and the southeast, even though these businesses accounted for only 34% of the business population.

Keith Morgan said: “I am pleased to see encouraging signs across a broad range of finance markets. As the recovery has continued and balance sheets have been strengthened, bank lending is gradually improving, with more firms getting the finance they asked for.” However, he admitted that although lending is up, there are “areas that still require attention.”

Looking to the Future

One of these areas is stunted business growth. The research showed that only 3% of start-ups become midsized, compared with 6% in the US, and Mr Morgan said the British Business Bank is now focussing on start-ups and scale-ups, using investment vehicles such as the Angel Co-Fund, which invests alongside wealthy individuals, Enterprise Capital Funds and its  £100m Help to Grow scheme. The Bank is also working towards righting the regional funding imbalance by investing a £400m into a Northern Powerhouse fund for northern businesses.

Anna Soubry, the Small Business Minister, said: “Small firms are the engine room of our country and it’s great to see this report recognising their hard work and growth. Even though the lending landscape is improving, I’m well aware access to finance remains a big issue and want to see even more help for small firms looking to invest and create jobs for people. The government is taking steps to increase availability of alternative lenders like peer-to-peer platforms and challenger banks, through our support for the British Business Bank.”

Kara Copple
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.