Credit and Finance
Smaller businesses providing growth, but still struggling with finance options
Back in 2014 in an interview with the BBC, David Cameron described small businesses as ‘the lifeblood of the UK economy’1 – this was true then, is still true now and is expected to be more so in the coming years.
New research findings by the Centre for Economics and Business Research (CEBR) in partnership with Hampshire Trust Bank, suggests that the contribution from small and medium-sized enterprises (SMEs) will grow even further in the next few years, amounting to an estimated £217bn by 2020.2 And the number of self-employed people in the UK has grown by 213,000 in twelve months.3
So with research predicting huge growth within the SME community and forecasts showing the vital contribution they’ll make to the UK economy…its madness to think that many SMEs are still struggling to access the funding they need.
The SME funding gap report recently published by Close Brothers aims to understand the ever changing needs of SMEs and some of the findings are scary knowing what we know about their importance to the UK economy.
A large proportion of SMEs still favour large banks when it comes to applications for finance and it’s clear to see why – a high street bank with heritage and stability is more attractive than smaller lesser known banks, however it seems this is where part of the issue lays – as the Close Brothers research suggests only a fifth of SMEs say their bank’s advice always meets their needs.4
Out of the people who applied for credit and were declined, figures show that the reasons for their original application were:5
- 18% would have used the money to start their own business
- 24% would have used the money to help grow their existing business
“This worrying trend of lenders not putting their faith in early stage SMEs looking to grow, due to lack of capital or cash flow, may well be stifling growth, having a knock-on effect on the wider economy in the long-term.” – Close Brothers.5
The report further identifies that as many as one in four small businesses are declined growth funding and a significant number have reported serious dissatisfaction with the service that had been offered by the bank.5
What can be done to break this cycle?
Many startup businesses or SMEs looking to expand and grow don’t see options such as Crowdfunding and P2P Lending as viable finance routes, with around 75% of those surveyed still opting for traditional bank loans,5 therefore the Government’s new Bank Referral Scheme has been welcomed by the SME community.
The scheme opens up multiple avenues by which an SME can apply for credit by ensuring that if any of the top high-street banks decline an SME application for finance, they must be referred to an alternative finance platform. Three platforms have been identified and these will then help match the SME to an appropriate lender.
There are numerous benefits to this scheme, one being that the person applying for finance can still approach the high street banks that they feel comfortable in approaching and if they are turned down, they can feel safe in the knowledge that they are being referred to a Government recommended platform.
Another benefit is that the lenders are likely to be smaller establishments who may understand the wants and needs of SMEs better than the large corporates do. The Close Brothers report identified some of the reasons why SMEs are refused finance:5
- 27% – Cash flow not considered strong enough
- 23% – Banks not lending to SMEs at the time
- 20% – The SME doesn’t have enough capital
- 19% – Business plan isn’t robust enough
Hopefully, some of these reasons would be eliminated by asking a smaller lender, someone who more clearly understands how an SME works and operates.
Keeping a check on the financial situation of your business is good practice in general, but it’s especially important if you’re considering applying for credit.
Specialist online tools can tell you how your business credentials appear to lenders and can highlight any factors that are having a negative impact to your score – if your score is being affected, there’s plenty of advice available to help you improve your credit score before submitting that application, giving you the best chance of securing funding from the first lender you visit.
Experian’s My Business Profile enables you to see your business in the same light that a lender would, giving you the opportunity to assess for yourself if your business is likely to secure that all important finance.