The SME Growth Watch Report reveals that overall lending to small and medium businesses decreased across the nation in 2015, yet early indicators in 2016 reveal an uplift in lending to SMEs and confidence that they can secure finance. The research, conducted by challenger bank, Hampshire Trust Bank and the Centre for Economics and Business Research (CEBR), analyses the latest full year British Bankers Association (BBA) lending figures to reach its conclusions; the overall 6 per cent decline in SME lending across the UK’s ten major cities between Q4 2014 and Q4 2015 contradicts an uptick in lending figures and SME confidence in early 2016.

The report revealed that 58 per cent of UK SMEs feel confident about securing finance over the next 12 months, and the latest quarterly BBA figures indicate there has been an expansion in SME borrowing this year.

“With SMEs across UK’s top 10 cities forecast to contribute £217 billion to the economy by 2020, the study highlights how vital it is to nurture the optimism they are demonstrating if they are to continue to be the engine room of the economy. Despite the confidence displayed by SMEs about securing finance in the future, the past data shows a steady decline in lending,” Nina Skero, managing economist at CEBR, said.

According to CEBR’s Skero, the reason for the previous decline in SME lending is two-fold. Tougher lending criteria set by banks have meant that those SMEs that wish to borrow have found themselves unable to do so. On the other hand, some firms have reduced their investment intentions and their need for borrowing, partially as a consequence of an unstable economic environment.

New research from Funding Options shows that SMEs may need more short-term funding to boost cash flow, as these businesses collectively owe HMRC over £1.8 billion in late corporation tax.

The total value of corporation tax payments in arrears has increased by 15 per cent over 2016, and according to Funding Options, the post-referendum economic slowdown has impacted SME cash flow to the extent where many businesses have even less cash to pay their tax bills in the future.

According to the funding marketplace, HMRC is using increasingly aggressive methods to recover overdue tax from businesses unable to pay on time, including late payment penalties, sending debt collectors to premises, and asset seizures.

Smaller businesses that usually use bank overdrafts as a stop-gap may continue to struggle in 2017, as overdrafts have been cut by £5 billion over the last five years, leaving them struggling to pay their tax bills without external funding. Conrad Ford, CEO of Funding Options has seen an increasing number of companies on his platform to get the temporary funds to pay their overdue tax bills. “These figures demonstrate the growing pressure on cash flow for companies, which could get worse following the outcome of the EU referendum. Companies might want to explore in detail alternative finance options available to them before HMRC comes knocking on their door,” he said. “Businesses need to make sure they have the adequate funding to pay tax bills on time, without taking capital from other areas of the business.”

Mark Sismey-Durrant, chief executive of Hampshire Trust Bank, believes that insight from these independent pieces of research is useful for challengers and alternative funders. “For too long, larger lenders have dominated personal and business banking and this has had a negative effect on SMEs, which often do not meet the lending criteria. However, SMEs are right to be confident about the future as there are different finance providers out there, away from the high street banks, which are able to support smaller businesses with their expansion aspirations,” he said.

To help businesses find other alternative ways of finding additional funding, the Government has introduced the Bank Referral Scheme, aimed at making it easier for small businesses to receive funding. As part of this scheme, banks are required to offer any small business whose loan application they have rejected a referral to three designated finance platforms, including Funding Options. Ford has outlined the whys and hows of the scheme on GrowthBusiness last week.

“The aberrationally low interest rate environment is polarising the global liquidity imbalance,” Sandy Kemper, chair and CEO of C2FO explained. “Corporates are increasingly being charged to hold deposits, while the banks themselves are struggling with increased regulatory burden that impedes their ability to loan to the SMEs which are such an integral part of the global economy. It is therefore increasingly important for those SMEs to consider alternative financing options that can close this gap and kick-start economic growth.”

But C2FO’s Colin Sharp argues that securing short term loans to pay off taxes just relieving symptoms of a much larger and wider spread disease: the culture of late payment.

“The increasing need for liquidity is pressing SMEs to pursue a variety of funding sources,” Sharp, SVP EMEA at C2FO, said. “However, as the large majority of SMEs still finance themselves with cash flow from operations, there is a significant opportunity for businesses to optimise working capital through better relationships with customers and better use of accounts receivables.”

New measures to support the Prompt Payment Code (PPC) and drive a culture of better payment practice were confirmed in a letter to PPC signatories from Margot James, Minister for Small Business and Philip King, Chief Executive of the Chartered Institute of Credit Management (CICM) in September this year.

The correspondence also confirms the future appointment of a Small Business Commissioner to provide help and advice to business, including on achieving prompt payment, and the Statutory Duty to Report for large businesses to report on payment practices that comes into force from 6 April, 2017.

The authors of the letter confirm that signatories should be paying within 30 days where possible and that this should increasingly be the norm. The PPC currently has more than 1,800 signatories, with each signatory committing to best practice in the fair and equal treatment of suppliers, many of whom are smaller businesses.

While the government is nudging the business community forward in best practices, a Federation of Small Businesses (FSB) report released as recently as November, found that existing policy interventions have had no discernible effect on tackling problems around the UK’s poor payment culture in the last five years. Small businesses report that, on average, 30 per cent of payments are typically late compared with 28 per cent in 2011.

A series of reports and surveys in recent months have highlighted the issue, with organisations such as the Asset Based Finance Association and Close Brothers Invoice Finance warning the problem is escalating in some industries, stifling growth and even leading to business failure.

According to Close Brothers’ David Thomson, SMEs need better protection from government and regulators, and while we eagerly await details of the government proposal to set up a Small Business Commissioner to intervene in disputes between SMEs and larger organisations over payments, it remains unclear exactly how the scheme will work and to what extent large businesses will be required to participate. The Prompt Payments Code, for example, is a voluntary standard.  “SMEs need better statutory protection and an independent champion prepared to take action on their behalf,” Thomson added. “Many SMEs feel very uncomfortable challenging larger businesses, on which they may be reliant for substantial amounts of revenue, over late payments; this is where regulatory action is essential.”

Thomson also urged SMEs to take action wherever possible before it gets to the point where they will need an overdraft or short-term loan to tide them over. “It’s crucial that SMEs try to grip this issue themselves,” he said. “You need to be crystal clear about your payment terms at every stage of your dealings with customers – and to chase invoices the moment they become due; consider credit checks on new customers and don’t accept poor practices from your existing customers.”