MHA | Access to finance; changes needed to help SMEs

Access to finance; changes needed to help SMEs

Greg Taylor · Posted on: June 6th 2024 · read

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The recently published Commons Treasury Select Committee report into access to finance for SMEs makes quite depressing reading for the millions of small and medium-sized companies that make up 99% of private sector businesses in the United Kingdom and raises some challenging questions for whoever picks up the keys to 10 Downing Street on July 5. The report was commissioned to explore access to funding for SMEs and what can be done to help those businesses to grow.

Restricted access to funding is a major stumbling block for SMEs. They find themselves faced with apathy among some larger lenders. And the current high interest rates that are making borrowing prohibitively expensive in many cases, among other factors.

That study also found that some 71% of SMEs say they are seeking funding to accelerate expansion plans. And almost three quarters - 73% -of those surveyed said that institutional lenders had failed to take the time to properly understand their business.

The Treasury report looked at various issues that are causing SMEs to find access to funding difficult or, in some cases virtually impossible. These include so-called debanking, whereby lenders have effectively ceased to provide finance to certain sectors like pawnbroking and amusement machines.

There is also growing concern that many SME’s, in non-higher risk sectors, are finding it extremely difficult to also open even a standard business account due to the regulatory demands on things like Anti-money Laundering (AML) and Know Your Customer (KYC), but also due to the lack on return the banks make on these accounts alone. The FinTech Banks like Tide and Starling go some way to plug this gap but aren’t really set-up for the Medium sized enterprises in SME.

The implementation of an update to Basel III, the so-called Basel 3.1 requirements, slated for introduction next year were also a focus of the Treasury report and are seen by many as another roadblock to SME funding. The Prudential Regulation Authority (PRA)’s latest Basel 3.1 proposals would see the risk weighting for SMEs increase to 85% from the current 75%. This would make lending to SMEs even more expensive and, the report notes, could damage UK competitiveness on the international stage.

As well as the hesitation among many larger banks to lend to SMEs, there are several other barriers to SMEs accessing finance in today’s climate. The vast sums of lending many businesses were forced to take during the COVID-19 pandemic means that they are often extremely highly geared.

Another significant barrier - and one that we believe can be overcome - is a lack of awareness and education among SMEs about the finance solutions available and appropriate for their needs - and how to access free, professional, independent advice. According to the recent British Business Bank Small Business Finance Markets Report for 2023/24, market intermediaries reported a lack of awareness of finance options (60%) was the main barrier for SME’s accessing funding from alternative finance options which would have given them the finance they sort.

SMEs are the backbone of the UK economy. But as a recent Treasury review showed, restricted access to funding, looming changes to banks’ capital requirements, and a lack of awareness about available advice, are among the barriers to SMEs’ survival and growth ambitions

Greg Taylor, Head of Banking & Finance
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Change is needed

The Bank Referral Scheme, launched in November 2016, was intended to help facilitate conversations between small and medium-sized businesses looking for finance and alternative providers that might be interested in providing them with the funding they require.

In brief, the scheme requires nine of the United Kingdom’s largest banks to pass on the details of SMEs to which they have refused funding to three Government-approved finance platforms - Alternative Business Funding, Funding Options and Funding XChange. Those platforms are then required to share the business’ anonymised details with alternative finance providers, in a bid to facilitate a conversation between the business and a provider that may be willing to offer funding.

Sadly, however, the Bank Referral Scheme simply no longer meets the needs of UK SMEs. Their requirements are far more complex and nuanced than can be captured by the standard and somewhat generic information requests they receive via the platform.

Instead they need access to advice and support from specialist, professional - and, crucially, qualified - advisors and intermediaries that have the capability to fully understand the individual nature of each business - and the knowledge and expertise to provide real guidance about the funding options available to them.

We support the call from the National Association of Commercial Finance Brokers (NACFB) for a new scheme with a centralised and completely independent system that would have commercial finance intermediaries and advisors at its core.

We also agree with NACFB’s call for the scheme to be widened to include the whole of the commercial lending market. This would enable lenders to refer businesses that they could not support, widening the net for businesses to a broader range of funding solutions.

It’s clear that there is a widening gap between those businesses that can access the funding they need to expand and flourish and those that cannot. It is vital that SMEs are able to not only access finance but to find the relevant type of funding solution that will enable them to grow, particularly against the current turbulent economic backdrop.

We want to see SMEs gain access to the funding they need to expand and grow. Giving them better access to free, professional advice and a wider range of lenders - including challenger banks and alternative providers - would, we believe, go a long way to achieving this goal.

It is vital that SMEs are able to not only access finance but to find the relevant type of funding solution that will enable them to grow, particularly against the current turbulent economic backdrop.

Greg Taylor, Head of Banking & Finance

For further information

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