Access to finance; changes needed to help SMEs

By Greg Taylor, MHA

The recently published Commons Treasury Select Committee report into access to finance for SMEs makes quite depressing reading for the millions of small and medium-sized companies that make up 99% of private sector businesses in the United Kingdom and raises some challenging questions for whoever picks up the keys to 10 Downing Street on July 5. The report was commissioned to explore access to funding for SMEs and what can be done to help those businesses to grow.

Restricted access to funding is a major stumbling block for SMEs. They find themselves faced with apathy among some larger lenders. And the current high interest rates that are making borrowing prohibitively expensive in many cases, among other factors.

Restricted access to funding is a major stumbling block for SMEs. They find themselves faced with apathy among some larger lenders. And the current high interest rates that are making borrowing appear prohibitively expensive in many cases, among other factors.

That study also found that some 71% of SMEs say they are seeking funding to accelerate expansion plans. And almost three quarters – 73% -of those surveyed said that institutional lenders had failed to take the time to properly understand their business.

The Treasury report looked at various issues that are causing SMEs to find access to funding difficult or, in some cases virtually impossible. These include so-called debanking, whereby lenders have effectively ceased to provide finance to certain sectors like pawnbroking and amusement machines.

There is also growing concern that many SME’s, in non-higher risk sectors, are finding it extremely difficult to also open even a standard business account due to the regulatory demands on things like Anti-money Laundering (AML) and Know Your Customer (KYC), but also due to the lack on return the banks make on these accounts alone. The FinTech Banks like Tide and Starling go some way to plug this gap but aren’t really set-up for the Medium sized enterprises in SME.

The implementation of an update to Basel III, the so-called Basel 3.1 requirements, slated for introduction next year were also a focus of the Treasury report and are seen by many as another roadblock to SME funding. The Prudential Regulation Authority (PRA)’s latest Basel 3.1 proposals would see the risk weighting for SMEs increase to 85% from the current 75%. This would make lending to SMEs even more expensive and, the report notes, could damage UK competitiveness on the international stage.

As well as the hesitation among many larger banks to lend to SMEs, there are several other barriers to SMEs accessing finance in today’s climate. The vast sums of lending many businesses were forced to take during the COVID-19 pandemic means that they are often extremely highly geared.

Another significant barrier – and one that we believe can be overcome – is a lack of awareness and education among SMEs about the finance solutions available and appropriate for their needs – and how to access free, professional, independent advice. According to the recent British Business Bank Small Business Finance Markets Report for 2023/24, market intermediaries reported a lack of awareness of finance options (60%) was the main barrier for SME’s accessing funding from alternative finance options which would have given them the finance they sort.