Lifeblood of the UK economy

Small and Medium Enterprises (SMEs) – the lifeblood of the UK economy –  are reporting significant problems in accessing finance. 99% of UK businesses are SMEs; responsible for 52% of the turnover of UK plc and employing more than 16.5 million people.

SMEs struggling to access finance

Supporting small businesses must be a priority for the government in both the build back better and levelling up agenda but currently SMEs face a £22 billion funding gap. There has been a 25% drop in lending post-recession (a trend reversed in Germany, for example, where regional mutual bank lending has increased by 20% in the same period!)

APPG Fair Business Banking Inquiry

Our APPG report, published today (7th September 2021), calls for urgent action to level up the provision of SME finance, with a far greater focus on distributing finance at a regional level and including community development financial institutions (CDFIs), regional mutual banks, challenger banks, non-bank lenders and fintechs.

I have been proud to be part of this APPG Fair Banking inquiry into SME funding and am grateful to everyone who has contributed to the report including the many experts who provided important and illuminating evidence.

SME business lending market

In our first evidence session we covered the business lending market for small businesses. A great panel and very good discussion. As ever, when looking at the impact of new technologies on access to business loans, there is great potential but significant barriers to overcome.

“Technology can improve access for everyone, unless you don’t have digital skills”

There is a role for government here but it is also brilliant to think about technology providing a new landscape of alternative lenders. It was good to hear more support for Post Office banking hubs; which can provide a source of cash deposits for SMEs as well as the support structure often needed.

Different models

Our second session focused on understanding how different models can fill the gap in provision of funding to SMEs. Another great panel and very good discussion. Importantly, it’s not only about the lending but about the support and advice as well.

We heard about community development financial institutions (CDFIs), private financial institutions that are dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities.

We also heard about mutual banks, regional cooperative banks, and recent evidence of better bank culture.

“Mutuals are less risky because they have a culture that is aligned with customers long term interests.”

The downsides are that it’s harder to access capital (who covers the costs of the increased risk in SME lending?) and the fact that competition law prevents smaller-scale regional business collaborating, which would actually allow CDFIs and Mutuals to potentially offer greater competition to the big banks.

Regional differences

Our final session looked into the regional availability of SME finance. Another excellent session and whilst much still to be done to improve the situation with regards regional disparity there is a lot that is working that can be built on; the British Business Bank, Northern Powerhouse Investment Fund, start up loans mechanism. Interesting to hear that NO Federation of Master Builders housebuilder members received CBILs although seemed to fare better with BBILS.

Levelling up

We are calling on Government to include these proposals in its Levelling Up white paper:

  1. Deliver a strong local finance option for every business in the UK – by providing capital to regionally based CDFIs and mutual banks which they will then multiply by lending to thousands of local businesses and also ensuring that mutuals can share resources in order to allow them to scale.
  2. Turbocharge the challenger bank and non-bank lending sector – these companies have provided welcome challenge to the Big Four banks since the crisis, however they are hamstrung by regulation which needs to be urgently addressed, including by reform to the minimum requirement for own funds and eligible liabilities (MREL) rules and access to the Term Funding Scheme for non-bank lenders.
  3. Unlock patient capital for growing companies – the Government should build on its welcome initiatives on unlocking patient capital from pensions funds and should copy an approach taken in France where a social usefulness criterion is used to unlock money for investment in long term, socially important companies.
  4. Ease the finance application process to encourage borrowing for growth – by ensuring that business support services – such as through Local Enterprise Partnerships – are properly funded and the Bank of England continues to promote the use of Legal Entity Identifiers.

It’s been a difficult year for small businesses and I hope the Government will take this opportunity to address some of the inequalities in our financial system – we urgently need strong local finance for every small business and this report is an excellent step in that direction.

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