£22 billion is not the kind of money that you’re likely to find down the back of the sofa. But this vast sum is the shortfall between what Britain’s smaller firms will need to function over the next four years and the finance that will actually be available to them, according to the National Audit Office (NAO).
Talk is of Britain’s economic recovery, but this £22 billion gap is typical of the reasons smaller companies are not in the mood to celebrate. The UK may be out of recession and the European Commission has predicted that it will be the fastest-growing of Europe’s major economies this year and next, but just 14 per cent of companies with up to 49 employees think that the economic recovery at home is fully underway, according to the latest Business Confidence Index from office provider Regus.
It’s not that those running SMEs are gloomy by nature. Generally, it takes a fairly optimistic type of soul to decide to go it alone in business and keep an enterprise afloat. But all the evidence is that small firms genuinely are being sold short when it comes to conventional lending.
- Almost four out of ten small companies less than five years old have applied for a loan only to be rejected, says the NAO. And this finding comes in the year after the launch of the Government’s much-vaunted Funding for Lending scheme, generally considered a failure since levels of loans to SMEs remain in the doldrums.
- The latest high street banking figures from the British Bankers’ Association reinforce the bad news, showing that net lending to businesses fell in eight of the last 12 months.
- A recent independent report into small business lending by the taxpayer-owned Royal Bank of Scotland (RBS) was scathing of the bank’s efforts with Britain’s small and medium firms, saying that RBS was slow processing loan applications, missed its own borrowing targets, and generally failed to lend despite having adequate capital to do so. Sir Philip Hampton, the RBS Group chairman, admitted at this week’s Confederation of British Industry conference that the bank had been too risk averse when dealing with smaller firms and had been prone to the ‘computer says no’ model, without sufficient levels of human input and decision-making when handling requests for borrowing.
Is it any wonder that business owners feel downcast? But rather than becoming too exasperated, many entrepreneurs have been taking things into their own hands to fill the funding gap. Increasing numbers are looking away from the high street and conventional lenders for sources of finance, according to the National Association of Commercial Finance Brokers (NACFB). It reported that its members saw their lending to SMEs reach a five-year high in 2012 to 2013, up 17 per cent year-on-year to £10.5 billion. Funding to small companies through leasing and asset finance went up 12 per cent, while the value of peer-to-peer lending and other new forms of small business finance also mushroomed by 80 per cent over the last year. Crowdfunding, business angels, and equity finance have all been growing in prominence of late, while the big banks continue to keep a tight grip on their purse strings.
The Government has effectively given its endorsement of this shift towards alternative forms of lending with the announcement of its new British Business Bank, which is set for launch next year and will bring together public and private sector funds to help SMEs gain access to up to £10 billion of loans. Of the £1 billion being put up by the Government about £300 million is allocated for investment alongside the private sector in new entrants and the growth of smaller lenders. Business Secretary Vince Cable is setting much store by this new institution, though his enthusiasm is not shared by all business experts. John Longworth, Director General of the British Chambers of Commerce, has said: “We continue to call for the Bank to be better capitalised and have the ability to lend directly to businesses, so that they can access the same level of financial support that companies in other countries take for granted. Otherwise, we run the risk of a Business Bank that is irrelevant before it starts.”
The new bank may not be the answer to all small firms’ funding woes, and it falls some way short of the £22 billion SMEs are estimated to need to keep on track until 2017. But it is a sign that the manner of lending to small and medium-sized businesses has changed irrevocably and is still evolving. As non-bank lending continues to grow in stature and many more options become available to business owners than the bank manager’s handshake, SMEs may have more reason for optimism than they currently think.
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