It’s Good News Firms Will Be Linked To Alternative Lenders.
The Chancellor’s announcement this week that banks will finally be required by law to refer SMEs they reject for loans to alternative lenders is fantastic news. George Osborne spoke at the launch of the new trade body Innovate Finance, and said that legislation is now on its way to help small businesses to “bypass traditional banks altogether” and to “require the UK big banks to pass on information on small businesses they reject for loans, so that… alternative lenders can step in and offer finance instead.”
It’s long overdue, as evidence mounts of the banks’ failure to meet small firms’ borrowing needs. The Competition and Markets Authority (CMA) is conducting a review that may lead to a full investigation into how the banks are letting down their business customers. This comes hot on the heels of criticism of the big banking providers by the Treasury Select Committee, which is also conducting an inquiry into why business lending is so hard to come by for small firms.
Now, Boost Capital’s own research reveals just how much this lack of funding is damaging Britain’s small business community. There are some industries in the UK where small companies dominate – retail, construction, manufacturing, and hospitality, for example. And our findings show that these sectors have quite clearly experienced slower growth since 2007, and contribute significantly less to Gross Domestic Product (GDP) than those that count a greater number of larger firms in their ranks. In other words, since the economic downturn many areas of business that are largely driven by smaller enterprises have seriously underperformed. And one conclusion is that a shortfall in bank lending is a major reason why.
Looking at some of the key SME-dominated sectors, the Boost Capital data indicates that:
- The manufacturing and construction industries have been worst affected in the UK between 2007 and 2013. Their contribution to GDP fell by £14.4 billion and £11.9 billion respectively.
- Wholesale and retail saw its GDP contribution reduced by £4.1 billion, while the hospitality industry’s share fell by £1.5 billion.
Are the banks really to blame?
In the complex world of economics, there’s rarely a single cause for a financial phenomenon. But it’s an irrefutable fact that funding for British small and medium businesses has dropped dramatically in recent years – by £2.6 billion to £39.2 billion between 2008 and 2012, according to our analysis of figures from the Government and British Bankers’ Association. Given that about 80 per cent of small business lending is still in the hands of the big four high street banks, it’s fair to reason that this is likely to have had a significant part to play in the plight of small firms, particularly when one considers that SME-strong sectors appear to be suffering disproportionately badly in the current lending climate.
Is it any wonder that the powers that be are finally asking the banking providers to justify why they’ve been quite so severe in their attitude towards their small business customers? For the smallest firms suffer most, our findings indicate, with the likelihood of a loan application being rejected increasing markedly the smaller the business is.
Should SMEs do more to help themselves?
When being quizzed by the Select Committee, the CMA’s chief executive Alex Chisholm put some of the blame on SMEs themselves, saying that small companies readily express dissatisfaction with their bank, yet very few seek to swap providers. Just 11,000 of the UK’s 3.6 million SMEs have changed banks since new rules were introduced last year to make switching easier. But Chisholm also admitted that a positive development has been the growing role of alternative lenders in small business finance, opening up choice and opportunity for smaller enterprises that are being starved of much-needed capital. Yet, the committee hearings also made plain that many small business owners don’t seek out or apply for these alternative sources of funding either because they’re not aware that they exist, or because they fear similar treatment by the new breeds of lender that they’ve previously received from the banks.
What alternative finance must do next
We here at Boost Capital have a wealth of experience working with small and medium firms, both in the UK and via our parent company Business Financial Services, which has been operating in the US for more than a decade. And we’ve seen that what’s happening in the UK is reflected in trends across the Atlantic – American banks have been less willing to lend to SMEs there since 2007, and small business-dominated industries are also suffering more than those typically populated by bigger firms.
Clearly, real scrutiny of how the banking institutions have been operating with regard to their small business customers has been a long time coming. But alternative lenders like us also have a great deal of work to do to educate small business owners that we’re here, open for business, and keen to lend to ambitious SMEs with plans for growth. And now legislation is soon to be on our side, working with us to spread the word to small companies that there are other financing options available beyond their bank manager.
This newly announced legislation has the potential to do a great deal to tackle the funding drought that so many small firms have been experiencing in recent years. Because there’s one thing we do know for sure: there are plenty of companies out there that are desperate for capital to put their plans for growth into action. And, now, it’s up to our industry, Government, and, yes, those heel-dragging banks to do all that we can to help them achieve those ambitions – for the good of small businesses broadly, and the economy in general.
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