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State of the NationUK Business Funding

New Rules Could Push Banks To Introduce SMEs To Alternative Finance

By June 4, 2014 No Comments
New Rules Could Push Banks To Introduce SMEs To Alternative Finance

UK Sterling Money Notes And Coins When the Queen laid out the Government’s plans in her speech at the State Opening of Parliament today, there was some encouraging news for small firms. A new Small Business, Enterprise and Employment Bill was announced, putting forward a number of proposals for SMEs, including making it easier for Britain’s smaller companies to access finance. How this last point will be achieved will be made clearer when the Bill is published on June 16, but one hope is that the banks will be required to direct SMEs that are rejected for conventional loans to sources of alternative funding. The Chancellor, George Osborne, revealed in his Budget in March that such a move may be imminent, since smaller businesses have been crying out for financing options beyond the banks that have severed credit lines in recent years.

We here at Boost Capital would be very pleased if such a bold legislative move were made. Not just for ourselves – we are one of those alternative lenders mentioned, after all – but for Britain’s small business community. Because one thing is certainly true – lending by the high street banks to SMEs is still in the doldrums, and small firms’ trust of the mainstream financial institutions remains perilously low. Something does need to be done to address this, as the evidence just keeps coming about how difficult many SMEs are finding things at present.

  • The latest data from the British Bankers’ Association (BBA) showed that UK businesses borrowed £2.3 billion less in April, with net lending at £275 billion, the biggest drop since last July.
  • Just a third of small companies turned to their banks for finance in the first quarter of this year, according to the latest SME Finance Monitor, the lowest level since the regular survey launched in 2010.
  • The monitor also showed that more firms – particularly the very smallest – were likely to look to alternative forms of funding, including trade finance and personal funds, to fill the gap.

How much you borrow – or if you borrow at all – is probably affected by where your business is based. Earlier this year, the BBA scrutinised the distribution of business lending around the British Isles. This study found that:

  • A fifth of Britain’s business lending was accounted for by small firms in London, while the South East took 13 per cent of all SME borrowing.
  • Small and medium companies in the North West and South West borrowed 11 per cent respectively, while firms in the West Midlands borrowed about nine per cent.
  • Scottish firms represented eight per cent of business lending, compared with Yorkshire and the Humber, and the East of England, which both took about seven per cent of the borrowing total.
  • The areas where business lending was least in evidence were Wales and the East of England – five per cent each of the lending total – and the North West, which only got three per cent of funds distributed.

What these findings don’t make clear is why firms in one area gain access to the borrowing needed to sustain and grow their enterprises, while others fail in this regard. The BDRC data indicates that many of the business owners no longer seeking bank funding took that decision because they’ve been rejected for loans in the past.

But small businesses can now let others know the truth of their relationship with their banks. A useful website went live last week offering SMEs the opportunity to share – anonymously – their experiences of dealing with the big banking institutions. Business Banking Insight, which has the backing of the Government, as well as influential business bodies the British Chambers of Commerce and the Federation of Small Businesses, gives frequently updated information about how individual banks are treating their small business customers. It allows business owners to add new findings to the survey based on their company size, from sole traders through to those running medium-sized firms. Visitors to the site can plug in their own information and conduct research using very specific search terms to see how other business bosses rate a particular bank in terms of its loans offerings, commercial mortgages, general business support, or asset finance services.

It seems that there’s a general acceptance that the banks have been too tough on SMEs for too long, and the big financial institutions are being increasingly challenged on their behaviour. A new Banking Standards Review Council was recently announced as part of Sir Richard Lambert’s review of the British banking industry, and one of its functions will be to scrutinise banks’ processes for dealing with small firms that are in distress. The council is broadly intended to create greater transparency in the ways that the major banks operate, thus repairing customer trust in these huge institutions. Knowing more and being able to hold the banks more accountable can only be a good thing for smaller firms.

Which brings us back to the Small Business, Enterprise and Employment Bill. That the Government has recognised the need for small firms to have strong, specific legislation addressing their needs – freeing up much-needed finance from sources other than the mainstream lenders, fighting against late payment of small suppliers by big business, and slicing through unnecessary regulation – is very encouraging. We hope that the Bill makes it through its multiple readings and passage through both Houses unscathed to be on the statute books in time for the General Election next year. The UK’s small firms need help and support to survive, grow and thrive. We want to give it. They want to have it. And we’re very glad that now legislation looks set to help us all achieve that aim.

Image courtesy of Serge Bertasius Photography /

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