Lack of growth finance restricting economy

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Restricted access to alternative finance options among small businesses is restricting UK economic growth weeks before the country is set to leave the EU, according to a new report from the Federation of Small Businesses (FSB).

Launched today, Going for Growth’ shows that only one in seven (13%) small firms are currently applying for external finance, with more than two thirds (68%) being offered lending rates above 4%.

Women business owners, those from black and minority ethnic (BAME) backgrounds and those based outside London and the South East find it particularly difficult to secure new funding. More than four in ten (43%) female business owners describe the accessibility of new credit as ‘poor’, noticeably more than their male counterparts (38%).

Of those that did apply for finance in Q3 2018, seven in ten (70%) sought a bank loan or overdraft facility. Lack of meaningful competition within the small business banking sector is a chronic issue. The UK’s four largest banks – RBS, Barclays, Lloyds and HSBC – control 80% of the commercial loan market.

Half (49%) of UK small business owners are thought to meet the definition of permanent non-borrower: not currently using external finance, with no plans to do so in future. Almost three quarters (73%) would rather grow more slowly than borrow to expand more quickly. Two thirds (68%) say they have no awareness of equity finance1.

Going for Growth stresses that Open Banking – which allows business owners to grant third parties real-time access to their banking data – is key to enabling greater access to alternative finance options. FSB is calling on the Government to work in partnership with industry to embark on an Open Banking awareness-raising campaign targeted at small businesses, promoting its potential and allaying security concerns associated with it.

The new report also flags the shortcomings of the Government’s Bank Referral Scheme, which directs small firms that have been denied bank finance to alternative funding matchmakers. Since the launch of the scheme in 2016, only 902 (4.7%) of the 19,000 firms that have been referred through the initiative have gone on to secure new finance.

FSB National Chairman Mike Cherry said: “Despite being a decade on from the crash we still have this dangerous combination of weak appetite for, and low awareness of, alternative finance options, high borrowing costs and inadequate support for small firms that are turned down by banks. Too many small business owners approach the big lender they’ve always dealt with as a first port of call when asset, peer-to-peer or equity finance could be a much better match for them.

“Efforts are being made – not least by the British Business Bank – to address these issues, but there’s still a huge amount of work to do. Open Banking holds massive potential. Having real-time access to accounts will make it easier for finance providers and investors to identify the right routes for clients and make decisions swiftly. We need to see the Government working with industry to promote Open Banking among small firms, while regulators need to ensure that lenders are meeting all of their Open Banking obligations.

“The Bank Referral Scheme is a vital initiative – one that should be continued. But it’s falling short of the mark. Far more pressure needs to be put on banks to ensure they are doing all they can to make those they turn down aware of alternative routes. Referring rejected small business owners shouldn’t be a box-ticking exercise. Big lenders should be made to work to meaningful targets.

“We know that women and BAME business owners face a number of additional barriers when it comes to accessing finance for growth. The BBB’s Aspire Fund was a welcome intervention, helping many women in business secure new funds. We need to see the launch of a similar mentoring initiative which provides support for all of the groups that face unique barriers in this space.”

FSB warns that a chaotic no-deal Brexit would further restrict small business access to finance. Its new report highlights the role played by the European Investment Bank (EIB) in improving small business access to new funding across the UK.

The EIB put more than £3 billion behind small business finance markets between 2006 and 2016 and backs the £400 million Northern Powerhouse Investment Fund (NPIF) and £250 million Midlands Engine Investment Fund (MEIF).

Mike Cherry added: “Suddenly losing access to the EIB would rattle small business finance markets, making it even harder for small firms to access new funding. The hit to the wider economy would be significant, stifling already weak productivity and growth.