While it may seem a long time ago, March 2015 marked an important milestone in the finance industry: two and a half years after the government launched the Funding for Lending Scheme (FLS), net lending levels to small businesses finally grew. After a tough 2014, where total net SME lending from providers participating in the scheme fell by an average of £500m per quarter, Q1 2015 saw a £635m increase, compared to an £811m decline in the final three months of 2014.
As UK economic conditions have improved, so have the number of companies looking to access finance to expand their business.
The SME Finance Monitor from BDRC Continental has conducted more than 65,000 interviews since its launch in 2011. This research found that the proportion of SMEs viewing the current economic climate as a major barrier to growth has declined steadily from a peak of 37% at the start of 2012 to 13% in Q3 2015. However, only 60% of SMEs planning to apply for finance after Q3 2015 were confident the bank would say yes, with the actual success rate falling below this.
While this ‘perception gap’ is narrowing, much more needs to be done to support SMEs looking to access finance.
The government’s referral scheme, part of the Small Business Enterprise and Employment Act, is an extremely welcome initiative and will provide a boost to the economy, making it easier for businesses to access finance if their original application had been unsuccessful. Under the new legislation, 10 of the UK's largest lenders will be required to refer the details of any SME whose loan application is denied to an online finance platform that can help match them with alternative finance providers - crucial for many firms who continue to view the established high street banks as the first port of call for their finance needs.
Such schemes as these are vital in encouraging entrepreneurs to invest further in their business and themselves, and significant barriers to finance can have a distorting effect on the economy as firms have to adjust their investment patterns. The SME Finance Monitor found that in Q3 2015, 46% of SMEs met the definition of a ‘permanent non-borrower’, with 80% of SMEs saying that their future plans for their business were based on what the business could afford to fund itself.
However, only a quarter (27%) of SMEs, having paid down existing debts, would not look to borrow to finance growth, and there remains a huge number of firms who lack the confidence to apply for finance, particularly outside the South East. While larger brands tend to dominate the headlines, it is worth remembering that SMEs account for at least 99% of the businesses in every main industry sector, and access to finance is a crucial element in maintaining the UK’s strong economic recovery.
Attributed to Charles Haresnape, Group Managing Director - Mortgages, Aldermore
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