Traditional Lending Methods Still Aren’t Helping SMEs, Despite Improving Fortunes for Banks
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Traditional Lending Methods Still Aren’t Helping SMEs, Despite Improving Fortunes for Banks

2014 looks set to be a year of slow growth and cautious optimism for the nearly 5m SMEs in the UK. Economic recovery is being talked about more loudly than at any time since 2008, yet many SMEs are still struggling to obtain vital funding that will enable their businesses to grow, or even just stay afloat.

Are Banks to Blame?

Despite welcome signs of growth, nearly a third of new UK SMEs fail within their first year. So is it all the fault of the banks? It’s certainly true that since the government bailout following the financial crash, banks have cut their lending dramatically to SMEs. For example, a report last year by the Bank of England’s former deputy governor Sir Andrew Large showed that small business lending by RBS had shrunk by £17 billion since 2008, and even profitable small businesses had been pushed into insolvency by the bank’s restrictive lending policies.

There’s certainly a popular perception these days that the big banks are failing small businesses in the UK by denying finance, and research from the Federation of Small Businesses last year revealed that over half of small business owners believed the banks did not care about their businesses. This line has been encouraged by politicians keen to be seen as “acting tough” on the banks but perhaps it’s not fair to blame the banks entirely. For example, a September 2013 report by Demos Finance revealed that the refusal rate for SMEs applying to banks for loans was only 1 in 25. More telling, perhaps, was the fact that only 40% of UK small businesses applied for credit during the previous year.

Problems with Traditional Lending Practices

This suggests that it’s not so much tight-fisted bank managers that are throttling the chances of recovery for UK SMEs but, rather, that there is a structural problem with traditional lending methods themselves. Tightened banking regulations since the crash means banks are requiring more collateral and security guarantees that many small businesses, especially new ones, are simply unable to provide. If the high street banks have their hands tied over lending practices, one solution is to open up the lending market to alternative, and more flexible, options for small businesses.

Supporting Alternative Lenders

Demos Finance Director Andrew Freeman wrote in The Spectator last year that “Our national debate about business funding has been impoverished by an insistence on looking to banks to provide the single answer.” Rather than the continued emphasis on traditional lending methods, he argues that Britain’s mixed economy needs different financing options and that government policy should support a wider range of non-bank lending to UK businesses.

Government schemes such as the Business Finance Partnership, set up to increase non-bank lending to businesses, can be seen as a step in the right direction. However, more needs to be done to support the UK’s alternative lending market in providing new financing options for small businesses.