The SME funding challenge – is the Chancellor up for it?
IWOCA recently released a survey in which 66% of SMEs said that creating policies to make it easier for SMEs to apply for finance should be a priority for the upcoming Budget. From our daily activities on the ground in arranging funding for growing SMEs, we very much concur with the conclusions of the survey and call on the Chancellor to support easing of funding shortages for the SME sector.
Bank lending to SMEs is continuing to fall. The Bank Referral Scheme has resulted in just £32m of SME funding since inception in 2016. Many lenders have simply withdrawn from the market and those that remain often send confused signals to the SME community as to what funding might be available.
The banks themselves are in a confusing place since the Global Financial Crisis, with the government pressure to support the SMEs, but also to reduce risk weighted assets and the amount of risk the banks generally take on.
We have seen the banks respond by retreating into safe ‘commoditised’ products like overdrafts and credit cards or into secured asset-based lending, like commercial mortgages and invoice discounting. Whilst this leaves the pure growth capital gap largely unaddressed, even the recent availability of the more vanilla and secured types of lending has become a lot less reliable or predictable with many deserving businesses turned away.
At Shaw & Co, we have been successful in arranging the required funding for SMEs from traditional lenders, but also increasingly from alternative finance universe, the latter requiring considerable guidance in a highly fragmented and constantly evolving market. Whilst we are very encouraged by the ability of the alternative market to step into the space left behind by the banks, we do see a number of concrete areas where government support could ease market inefficiencies in SMEs getting the right funding.
One such measure could be centralisation and standardisation of Know-You-Customer documentation, which can be extremely cumbersome, time-consuming, full of wasteful duplication and costly. Another would be to mandatorily speed up processes such as the release of security when an SME is migrating between lenders.
A third would be to encourage the banks to be far clearer about their product offering to reduce the wasted time, effort and money resulting from SMEs applying for products, which realistically aren’t available to them. Yet more could be achieved by substantially widening the Bank Referral Scheme to a larger number of more varied players that can demonstrate effectiveness. There is no shortage of concrete ideas.
We see on a daily basis how making the right growth funding available to an SME rapidly unlocks their huge growth potential and results in new technologies, increased productivity and employment. The transformative power of the SME sector for the UK economy is indisputable and empowering SMEs with better growth funding environment is one of the most effective measures for the Government to consider in order to grow the economy, as well as to level it up.
If you would like to discuss any issues raised in this blog, please contact Alexei Garan.