Small businesses are essential to the UK economy: they account for over 99 per cent of all private sector companies across all industries, 47 per cent of the country’s overall private sector turnover, and 60 per cent of all private sector employment. Directly and indirectly, they make significant contributions to the nation’s workforce, its tax revenues, and its GDP. So why are they relatively unsupported by the UK government?
It’s a historical problem, and one that crosses party divides. Gordon Brown appointed Lord Sugar, who described entrepreneurs as a bunch of ‘moaners [who] live in Disneyland’, as his business champion. The 2010-2015 coalition made loud noises about its ‘Project Merlin’ initiative – which was to see five major high street banks finance more SME loans – but it missed both of its initial lending targets and then disappeared off the face of the earth (no data for the project has been released since 2012).
In the last ten years alone, British SMEs have shared a ministerial portfolio with larger enterprises, universities and FE colleges, international trade, regulatory reform, energy and climate change. They’re always competing for attention and resources with other policy areas; the fact that government initiatives tend to be undercooked, neglected, or discarded entirely isn’t necessarily a surprise.
The British Business Bank (and the failures of enterprise finance initiatives)
The government could do more to encourage lending and raise awareness of different financing options – but first, it should examine what doesn’t work about its current approach to SME funding.
First launched in 2012 by the Treasury and the Bank of England, the Funding for Lending scheme (FLS) is an initiative to provide commercial banks with cheap funding to incentivise them to boost their lending to small businesses. Since 2012, lenders have drawn £60.6 billion of cheap funding from the bank, with £2.87 billion borrowed in the three months to June. Lloyds Banking Group and Santander were the biggest recipients, taking £1 billion each. Net lending to small businesses was actually negative in 2014, though this was reversed in 2015.
However schemes like this are redundant in a market where solid, collateralised start-ups can’t secure the funding to match. UK banks have an overly traditional and all too conservative approach to lending, which just doesn’t sit well with small businesses in sectors like the innovative tech start-up scene. Until this mentality changes and the banks understand the requirements of these businesses, then SMEs will still struggle to secure the finance they need, regardless of schemes like the FLS.
This programme is being wound up in 2018 and the BoE openly admits that its successor, the Term Funding Scheme, won’t actually boost lending to businesses, but will just encourage banks to pass on the BoE’s interest rate cut.
The British Business Bank (BBB) is another prime example: established in 2012, it’s a state owned economic development bank designed to help boost the supply of credit to SMEs, increasing their access to the finance they need to thrive. But the BBB relies heavily on conventional high street institutions, which refuse around 50 per cent of start up owners’ funding applications – and this inevitably causes problems.
The BBB doesn’t rely exclusively on the banks to increase lending, but its investments with alternative finance providers have ironically been concentrated amongst the biggest platforms. The BBB has given £200 million to just seven P2P lending platforms including the four biggest – Funding Circle, MarketInvoice, Zopa and RateSetter. It has turned down over 120 applications from smaller P2P lenders such as Rebuildingsociety, even when these lenders offer lower rates and better deals – at once limiting the options available to small businesses and helping to create a less competitive P2P lending market that favours a few major players.
The likes of FundingCircle and MarketInvoice reject the overwhelming majority of SME loan applications and rely heavily on institutional finance, so for the average business, there’s little that meaningfully distinguishes them from a conventional bank.
We must also consider that the UK is about to leave the European Union, and – given how many BBB schemes rely on EU funding – this may have an impact on the level of finance available.
Alternative routes to SME finance
The new government deserves a chance to address these concerns and to set out its enterprise agenda; though it contains no provision for our future outside the European Union, it’s encouraging that Philip Hammond has guaranteed funding continuity until Brexit becomes official. UK SMEs, however, can’t afford to wait around: the government should make sure they’re aware of the best option for their business when it comes to funding.
Other routes to finance hold many benefits for the SME: smaller alternative lenders don’t have to leapfrog as many regulatory obstacles, and are typically able to deliver funds with greater speed and flexibility. If you need funding quickly, and many entrepreneurs do, they can be a solid option.
But if the government wants to truly support small businesses, they’d do well to open up finance up to as many of them as possible. This doesn’t mean doing away with due diligence or lending to companies that won’t make their repayments. It does mean adopting a more holistic – and less criteria-driven – approach. The question should never be ‘Do they tick box 1 of 20?’, but ‘Can we help this company prosper?’
When they start answering ‘yes’, your business may well benefit. Until they do, you may have to find other ways to plug the gaps. That these methods are available at all is a credit to determined, innovative small businesses – and no thanks at all to the government.
Richard Prime is co-CEO of Sonovate.