5 Reasons for New Regional Growth Funds in 2017
Earlier this week, the independent think tank Civitas called for the government to pump fresh funding into responsible finance providers (RFPs), warning that over half of their funding streams, including from the government's Regional Growth Fund, are due to run out this year despite a huge increase in demand. Both the Times and Daily Mail agree on the need to close the funding gap for SMEs and the logic of continuing to use RFPs to do so. Here are 5 reasons why…
Reason 1: SMEs are vital to the UK economy
Did you know that SMEs make up 99.9% of all private sector businesses in the UK, 60% of private sector employment and 47% of private sector turnover?
Did you also know that in 2015 86% of the 11,440 SMEs to which Responsible Finance Providers (RFPs), like Foundation East, lent £98m had been turned down by a high street bank?
As Civitas points out:
“The types of SMEs being rejected make up a significant proportion of the SME sector: 49 per cent of SMEs have a worse than average credit rating and 96 per cent of businesses in the UK are small, employing between zero and nine people. Their lack of finance is resulting in lost output, employment and economic growth.”
Reason 2: Mainstream finance does not have the infrastructure to judge SME applications fairly
It is indisputable that the funding gap for SMEs needs to be plugged, yet, this cannot be achieved by bank lending alone. I refer again to Civilitas:
“Requiring banks to extend finance to the risky SMEs would not be sensible, and the variety of products required by the smallest SMEs could not be delivered efficiently by one type of provider. According to the Federation for Small Businesses, ‘banks cannot be expected to design and provide products and services to meet the needs of all types of smaller businesses.’ Instead, other finance providers are required to help plug the funding gap. Responsible finance providers (RFPs) are one such provider.”
So, what is it about SMEs that fails to meet high street banks’ lending criteria?
Many of the SMEs that apply for loans from Foundation East have been turned away from High Street banks because they are small and new and simply do not have the information required by lenders to make an informed investment decision; typically, they do not have a credit history or trading record. This lack of information makes it difficult and costly for the lender to assess the SME and subsequently extend finance, even if the SME is a viable business.
It can also lead lenders to ask for large levels of personal guarantee, or collateral, that the SME simply does not have, or worse still, the significance of which the entrepreneur does not understand, sometimes committing to loans at ridiculously high personal risk, as reported on by The Daily Mail’s Vicki Owen.
Reason 3: RFPs have a proven infrastructure in place to guide and support SMEs
In contrast, RFPs have a proven infrastructure in place to support SMEs that have viable business plans, yet do not tick high street banks’ (justifiable) boxes.
At Foundation East, for example, a highly experienced business loan manager works with each loan applicant to develop their business plan to a point at which they are happy to recommend the loan. They explain the terms and conditions in person to the applicant, ensuring they understand them. Then, our loan manager presents the business plan and makes a case for approving the loan to a loans assessment panel (LAP), a team of local business experts made up of entrepreneurs, business advisors, bank managers, solicitors and accountants who volunteer their time and expertise.
If approved, our business loan managers remain in constant contact with their clients throughout the term of the loan, mentoring and guiding them. We provide more than just loans. We provide expert business support too.
Reason 4: RFP funding streams are drying up
Did you know, that despite the success of increasing demand for RFP finance, 57% of our funding streams, including the government’s Regional Growth Fund, are due to run out this year?
Did you know that £1.6 billion has been lent by RFPs over the past 10 years, supporting over 50,000 businesses and social enterprises and helping to create, and save, over 100,000 jobs across the UK?
Without RFPs’ business loans, over 100,000 jobs would not exist today.
Reason 5: A new RFP fund would help to achieve the government’s wider objectives
Theresa May claims to be working towards an ‘inclusive industrial strategy and an economy that works for everybody’. A new RFP fund would achieve both these objectives. Creating one should be high up on her, and her government’s, New Year resolutions.
If you agree with these reasons, please write to your local MP, maybe sharing the content of my post. Or, even better, do this, and become a member of Foundation East, so that you can help us to help even more local SMEs in 2017.