To call SMEs (Small-to-Medium Enterprises, or simply small businesses) an undeniably crucial part of the UK’s business landscape is an understatement; SMEs account for 99.9% of the UK’s business population, and more than half of the UK’s GDP in 2019. Despite the existential importance of SMEs to the economy, they have encountered systemic and historical barriers to funding from mainstream lenders. But is this still true in the modern day – and if so, what is the route forward for a demographic worth £2.2 trillion in annual turnover?
Lending to SMEs
According to a recent report by research organisation Amplyfi, there has been a consistent uptick in loan agreements between SMEs and larger banking institutions since 2016, levelling out in 2019. Peer-to-peer lending dropped off significantly with the advent of coronavirus, while the volume of loans granted to plug costs related to coronavirus increased significantly – though the latter loans were not granted for growth purposes, but rather survival. Of the mainstream banks that provided loans to SMEs pre-pandemic: 80% of approved loans were offered by just five banks.
A Substantial Funding Gap
Despite the increase in funding even before the outset of the coronavirus pandemic, SMEs still faced a significant funding gap in comparison to larger companies – and a gap which grew significantly over a five-year period. In 2014, it was reported that the funding gap existed at around £4.3 billion, but US reporting in 2019 suggested the UK’s SME funding gap was as large as £56 billion. The Amplyfi report also revealed information about the exact role major banking institutions played in this funding gap, illuminating the fact that 50% of first-time applicants for a bank loan were rejected on grounds of not meeting risk requirements – and that 40% of those applicants were deterred from applying again. Each SME loan would represent an up-front cost for banks, which, in still feeling the effects of the 2008 financial crash, represents a significant risk to their interests. These banks were also not incentivised to offer financial advice to new and burgeoning SMEs, something only corrected by legislation in 2015.
Closing the Gap
What remains to be done about the funding gap for SMEs? Legislation requiring banks to offer details of alternative lending solutions has not improved the situation, with the funding gap instead increasing ten-fold. With mainstream banks largely responsible for the gap, owing to their unwillingness to change policy regarding risk, non-bank lenders are becoming increasingly crucial to the success of the SME. Recovery loan schemes from commercial finance organisations are offering a way for businesses negatively impacted by coronavirus to negate their losses and return to business, while ‘challenger banks’ disrupt the banking industry and offer alternative funding solutions to the larger organisations.
Covid represents an unwelcome challenge for SMEs in the 21st century, already burdened by lack of access to crucial growth funds – but the emergence of non-bank solutions represents a sea change in the way SMEs can source growth, even if they merely mean treading water in the short term.