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Show SMEs the money

Access to finance is one of the most talked about issues amongst small businesses. But what’s the issue and what’s being done about it?

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All businesses need money to make money, so why is it so hard to access finance?

Imagine the scenario - you’ve spent two years developing an incredible business idea. You’ve nailed your business plan, stress-tested the numbers and even made a few sales in the last couple of months. 

Everything’s in place - now you just need some funding and you’ll really be on your way.

Only the road charged with momentum and determination that’s got you this far seems to have led you to a cul-de-sac of brick walls.

Like a modern-day Jerry Maguire shouting “show me the money”, it all feels frustratingly in vain.

Unfortunately, for plenty of small business owners out there (and I imagine many of you reading this), it’s not necessary to imagine this scenario. For many, this is reality. 

But why is this still the case in 2024? Study after study tells us that the 5.6 million SMEs are a powerful force of good in this country. Whether it’s the collective £2.4 trillion turnover (53% of the total turnover of all private businesses) or the 16.7 millions jobs (61%) they create in the private sector - you’d find it hard to argue the seismic difference SMEs make.

And don’t take my word for it, these numbers are all backed up by the government’s own 2023 findings

So if the proof is there - where's the confidence to put more guidance in place? To introduce the opportunities and schemes that can enable small businesses to access the cash they need?

Why, in 2023, were there 585,807 company dissolutions? A 0.7% increase on 2021-22, and the highest number of dissolutions on record.

Let’s take a look at some of the reasons why accessing finance is so difficult and what’s being done to tackle the problem. 

1. Limited (and complicated) funding options

Traditional lending methods like business loans and business credit cards may seem like the instinctively obvious starting point. And they can be for many. 

But they often have stringent criteria, meaning the process can be complex and require a lot of evidence to back up business plans and performance. You may even need to stump up some collateral as part of the process, which can be even more difficult if you’re a new business. Of course there are also startup business loans, but the application process is no less difficult.

In short, you have to be prepared and determined to prove your business worth and detail why it’s worth a lender’s consideration. That in itself can be off putting. There’s no getting around the complexity of the process or how time consuming it is. Many SMEs may simply feel the whole process diverts too much attention away from the day-to-day of running a business. 

These reflections are further compounded by the Federation of Small Businesses’ (FSB) recent Super-Complaint to the FCA. This complaint, the first of its kind since the Super-Complaint regime was applied to the FCA in 2013, is centred around the requirement of some lenders asking SMEs to provide personal guarantees for the finance they need to support their application. 

This isn’t something that’s required of everyone that’s looking to borrow, and only adds to the risk (and worry) for small business owners when applying for finance.

2. Risk aversion

The reason for the stringent lending criteria and lenders’ putting more on SME finance applications in the first place is down to the perceived risk.

All lenders consider the risk before lending, whether it’s an application for a personal loan or a business loan. While there’s no arguing the significant value SMEs bring to the UK economy and its communities, 20% fail in their first year and 60% of startups fail within three years of trading.

This won’t make for happy reading to a lender. Alongside this, they’re also weighing up potentially limited operating history against uncertain market conditions. They’re thinking about the unpredictability of more dynamic trading environments and the ever changing (potentially game changing) technological advancements.

All of which combined makes for nuanced, complex lending decisions - which ultimately means detailed, complex lending applications. 

3. Lack of awareness

Dynamic innovation hasn’t escaped banking. And many SMEs may simply be unaware of the technological advancements in banking and borrowing.

You’re no longer bound to traditional high street banks anymore. There’s a whole range of alternative finance options out there, from crowdfunding and venture capital schemes to angel investors and peer to peer lending. 

Awareness doesn't happen overnight. The only reason many of us instinctively think of traditional lending is for that very reason. it's traditional - it's been around for a while. 

For ‘challenger banks’ and alternative lending platforms to achieve this same level of awareness takes time. And it’s the duty of those of us on the side lines, cheering SMEs on, to continue to bring awareness to alternative lending options so it never feels like there are no options.

4. Regional inequality

It’s not who you know, it’s where you live. Not a common saying, but it certainly seems to ring true when you look at the stats.

London has the most businesses per 10,000 residents in the UK by a fair way: 1,477 businesses per 10,000 residents. That number dips considerably for the North East, where it’s slashed to 718 businesses per 10,000 residents. 

More than a third of all UK businesses can be found in London or the South East. That’s 1,852,000 businesses. 

This can feel like it’s the “north/south divide” in full effect, but there’s more to regional disparities than just the number of businesses operating in a region. For example, SMEs in more rural areas often find accessing finance more challenging. There are fewer investment opportunities due to lower levels of economic activity and limited access to banking facilities. 

And if an SME is in an area that has historically performed poorly, whether that’s due to weak economic performance or high unemployment rates, they may find it more difficult to attract lenders or investors. And those metrics can also influence government policy and investment priorities too - a double edged sword. 

5. High costs of borrowing 

If you’ve successfully been approved for finance, the worry of the application may be replaced by the worry of how you’ll pay it back.

Interest rates are high, stubbornly so, and that leads to higher repayments for borrowers. That’s not unique to businesses, rates are high for personal borrowing too. But if you’re running a business, you’re also weighing up what the impact of the repayments will have on your profits. And if it takes a big hit on your profits, is your business plan still sustainable? 

Of course it’s not all doom and gloom, and there are countless examples of small businesses repaying their debts in a manageable way that doesn’t get in the way of growth, but it’s important to do the sums. You can always speak to a financial advisor or accountant if you’re not sure where to start. 

If you’re a sole trader or budding entrepreneur, there’s also the risk that defaulting on repayments will impact you personally. Lenders will always want to work with you if things go wrong, and there are resources available to help such as StepChange and National Debtline, so never worry in silence.  

Where are we now?

The problems with accessing finance identified here aren’t new. They’re perhaps felt more acutely now, particularly against the backdrop of soaring energy costs, but various things have been put in place to try and bring about remedies to these pain points.

  • The Help to Grow campaign - a government hub designed and developed to help SMEs understand what support is available to help start, grow and succeed. There are resources with information on finance and funding, selling internationally, starting out and scaling up

  • Small Business Council - another government initiative to kick off 2024 as “the year of the SME”, this was set up as a way for SMEs voices to be heard by the powers that be. Access to finance is high on its agenda

  • Treasury Select Committee (TSC) inquiry - In summer 2023, the TSC launched an inquiry into small business access to finance and SME lending. The findings of the responses to its call for evidence (which ended in September 2023) are yet to be announced. But the inquiry recognises the importance of cross-party collaboration on this important matter and evidence collected can be seen here

  • FSB Super-Complaint - The FSB is firmly committed to being by the side of SMEs, acting as the voice and representative of millions of small businesses. The Super-Complaint they have raised puts their ambitions front and centre, and the outcome of the FCAs findings are eagerly anticipated

  • SME lending task force - Announced by the Economic Secretary to the Treasury, this new task force was set up in April 2024. It will set clear recommendations and a definitive path to enhance SME lending through the implementation of open finance

Addressing the issues that sit behind SMEs' access to finance is complicated. It will need government policies, support networks and financial institutions to come together to address the concerns head-on and develop a strategy to improve the overall landscape. 

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About Kyle Eaton

Kyle is a finance editor specialising in all things related to small and medium enterprises (SMEs). He has over ten years' experience working in financial services and as a writer.

View Kyle Eaton's full biography here or visit the money.co.uk press centre for our latest news.