Mind the SME funding gap

Speaking ahead of Wednesday's Budget, John Cridland, director general of the CBI, called on the next government to mind the 'financial gap' experienced by many medium-sized UK businesses.

Without due support says Cridland, these ‘job creating dynamos of the economy will suffer.’ Indeed it’s not just the firms that will suffer, but the wider British economy. David Cameron recently remarked that the government estimates there is a £1bn annual funding gap to be plugged. Medium firms – those with a turnover of £10-£100 million – represent just 1% of UK companies, but make up 22% of revenue and account for 16% of employment.

The roots of this problem can be traced back to the financial crisis, after which banks became more cautious about lending to SMEs, which they perceived as high risk. In narrowing this traditional avenue to finance however, banks have also put up a barrier to SME growth. Indeed our own research, which surveyed 250 UK SMEs, has revealed that 38% believe that their growth is being hampered by insufficient access to funds.

Recognising the problem, the Government has launched several polices to drive funding for UK SMEs. Perhaps the most publicised example of these is the Funding for Lending scheme, established by the Treasury and Bank of England (BOE). Despite being lauded by politicians as a flagship policy, the scheme was widely branded a failure last month after statistics released showed that lending to SMEs had actually continued to decrease throughout 2014. Under the scheme, net lending slumped by £810m in the final quarter of last year, taking the total decline to just under £2bn over 2014.

With SMEs receiving so little support from traditional forms of finance, it’s unsurprising that the alternative finance sector is going from strength to strength. Research conducted by Cambridge University and EY has revealed that the alternative finance market in the UK is now the largest in Europe. In 2014, the amount raised by peer to peer (P2P) business lending increased by 200% on 2013’s figures, taking the UK market to €2.34b (£1.78 b).

This liquidity is clearly making a difference; January’s Trends in Lending report published by the BOE showed that demand for credit from small businesses is continuing to decline, and although it would be reductive to suggest that the only factor behind this trend is the strengthening P2P industry, it must be a significant contributing factor. Indeed, the increasing popularity of alternative finance among SMEs is further supported by our own research, which found that 50% of SMEs believe that alternative finance is opening up new opportunities for them and 68% would consider using alternative finance platforms.

Another interesting, but perhaps more concerning, trend from the BOE report is that while demand for credit from small businesses is declining, demand from medium sized businesses continues to increase. One reason for this may be that the majority of P2P platforms are targeted at the smaller end of the SME spectrum, typically offering up to £1million of debt finance. This leaves larger SMEs underserved, under-funded and in danger of failing to achieve their full potential for growth.

>More on funding: Top tips for SMEs seeking finance

What is more frustrating is that larger businesses are conscious of, and open to alternative finance. In comparison to smaller SMEs, our research indicates that 85% of businesses with revenue over £1.1million are aware of alternative finance and 94% would consider using it. This indicates that there’s clearly an appetite for alternative finance among larger SMEs – which it’s now down to the industry to meet.

The good news is that alternative finance solutions are now rising to fill this gap. At UK Bond Network for example, we specifically cater for larger SMEs, offering between £500k and £4m of debt finance per transaction – and have helped a number of companies achieve desired growth this way. Our latest bond issue is for CIP Recruitment, a profitable UK company looking to raise between £1 and £1.5million to support growth plans – including the opening of a new Manchester office. CIP is just one of the many companies that, if allowed to grow, will take the benefits of this into UK regions, increasing job creation and supporting local economies.

What’s clear is that the financial services sector is undergoing radical change. While new, alternative forms of finance are opening up opportunities for SMEs, awareness and confidence among businesses needs to increase if they are to take advantage of these. Oxford Economics has revealed that mid-markets are already contributing almost twice as much to UK growth as the entire financial services industry – it would be fantastic to see what they could achieve if they were given better access to funding. Ironically it’s the size of medium businesses – one of the factors that make it so difficult to for them to obtain funding – that is their biggest asset. More productive than very small businesses and more flexible and innovative than larger firms, these are perfectly positioned to transform funds into successful business growth.

Government legislation, which will compel banks to refer SMEs who are rejected for loans to alternative finance providers and challenger banks, is likely to increase awareness and drive take-up of alternative finance. However, given the large percentage of businesses who first seek advice from their accountant or professional advisor, increasing understanding among these professionals is also critical, and will help us take another step towards bridging the SME funding gap, and deliver real economic growth in the UK.  

Further reading on business finance:

> 10 steps to crowdfunding your business

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.