Why access to finance is still the elephant in the room when it comes to SMEs and micro-businesses …
Hard, soft or no Brexit, the UK’s economic growth depends on small businesses and SMEs. It doesn’t take an economist to work this out although it has taken the banking sector a while for the penny to drop. Now the penny has dropped, this previously under-served sector of the UK business community is being targeted by more organisations than ever before, offering more loans than ever before, as evidenced by smallbusiness.co.uk. in its ‘Alternative solution to Brexit finance problems for small businesses’ article last month.
Good news, surely? Err, no! Not unless the UK government takes steps to ensure that those businesses that were being refused credit before these new funds came into being, can now access finance, either directly or via a dedicated responsible finance fund …
According to Small Business, the leading publication targeting small business owners, funding for British SMEs from alternative finance firms now tops £15bn annually and is set to grow strongly up to and beyond 2020s.
It’s plain to see why when you look at the facts:
- Small businesses account for 99.3% of all private sector businesses in the UK
- UK SMEs account for 99.9% of all private sector businesses
- UK SMEs employ 16.1 million people (60% of all private sector employment)
- UK SMEs annual turnover is £1.9 trillion (51% of all private sector turnover)
Or, to cut to the chase, the UK’s economic growth depends on small businesses and SMEs!
There’s little surprise then, that in the face of Brexit there is an increasing choice of loan provider (and platforms/ web sites upon which to compare offers) for the nation’s army of SMEs to choose from.
Yet, according to the Federation of Small Business’s (FSB’s) Small Business Index the proportion of small businesses being refused credit is still increasing. Here at Foundation East, we’re seeing evidence of this on a daily basis, as are our colleagues across the UK.
Time and time again, SMEs and micro-businesses are being told ‘No’ by even more SME finance providers than they were before this sector’s recent growth. Time and time again, responsible finance providers like Foundation East in the Eastern region, Business Enterprise Fund in the northern region, ART in the Midlands, Let’s Do Business in the southern region and SWIG Finance in the western region are reviewing these businesses’ plans, identifying that they are viable and providing loans and support. Time and time again, these SMEs, micro-enterprises and social enterprises that the responsible finance sector supports, go on to meet the credit criteria of mainstream finance.
Coming back to the Eastern region, take the case of Foundation East client, Kathryn Berale of Essex-based Cabello Hair and Beauty. Kathryn’s bank manager referred her to us when his lending criteria meant he had to say ‘no’ to providing working capital during the early phase of her start up business. We could and did say ‘yes’. We worked with Kathryn establishing good financial practices, enabling her to show that she was less of a risk by demonstrating that she could meet loan repayments. It did not take long for Kathryn to meet her bank’s credit criteria, and for them to give her a loan to fund her next growth phase.
And it’s not just mainstream finance providers that ultimately benefit from our sector supporting the businesses they turn away; as Kathryn points out, the wider community benefits too:
“I will never forget how Foundation East gave me my fresh start. Without them, I’d have never have owned a business again. Responsible Finance companies are not-for-profit businesses. They re-invest any surplus profit into more small businesses. They help when the bank says ‘no’. Ultimately, it’s the community that benefits from their work, not anonymous shareholders.”
Business owners like Kathryn come to us, often, thanks to a referral from their High Street bank. These banks know that since our inception in 2004 we’ve lent £9.8 million to 608 businesses who they have turned away. All of the businesses we’ve supported over the years have had viable business plans. Between them have created and saved 1250 jobs, positively contributing to our region’s economic impact. Such business owners and their employees were lucky. Others have been less lucky. Having not been signposting to the responsible finance sector, they have stumbled upon a growing range of less transparent finance providers. These providers’ terms and conditions turn such enterprises’ minor cash flow issues into full scale viability crises.
As my Responsible Finance’ colleague, Jennifer Tankard, points out in a recent PoliticsHome opinion piece: “Lending to SMEs often requires personal guarantees so the business owner is personally liable as much as they are with a consumer loan. Because of this, inappropriate lending to small businesses can prove catastrophic. Not only can it result in the loss of a business and jobs but the consumer (director or owner) is personally liable and affected too. In extreme cases business loss can also result in the loss of the family home, marital breakdown and suicide.”
This is why my colleagues and I are so surprised that smallbusiness.co.uk did not even namecheck our sector in its recent report. It’s also why we’re lobbying the UK government for a new responsible finance fund and further regulation around lending to SMEs and micro-enterprises, as well as clear contracting regarding replacing EU finding. And why we’ll be working with the growing layers of post Brexit-focussed SME finance providers to ensure ‘all’ small businesses get the finance they need.
So, how can we ensure ‘all’ small businesses get the finance they need?
Most small businesses are not run by finance experts. It is time for the finance sector to recognise this and to ensure that all of their communications and dealings with small enterprises and SMEs are transparent.
All business lenders need to:
- Undertake proper affordability checks
- Clearly display the cost of credit including charges on late and missed payments
- Word their loan contracts and information in ways that reflect consumer lending contracts to enable a better understanding
- Offer support to enable customers to build financial capability skills
The responsible finance sector already operates in this way. We lend to high-risk businesses who do not meet the requirements of High Street lenders or the requirements of this new layer of middle men. By signposting clients who do not meet their criteria to our sector, these new middle men, like High Street lenders, can be seen to be responsible now and in being responsible now, can benefit from the business of the next generation of SME and micro-business trail-blazers, like Kathryn Berale, in the future.
Access to finance is still the elephant in the room when it comes to SME finance. It’s time for the government and the banking industry to focus on access to fair finance for those that do not tick the boxes of mainstream lenders, rather than on simply maximising the number of lenders in the SME finance sector. That’s why our sector is calling for a further £150 million investment, including a dedicated responsible finance fund similar to that in the US, clarity around replacing EU funding and further regulation around lending to SMEs and micro-enterprises. It’s also why we’ll be connecting with these new SME finance providers, requesting that they signpost those businesses that do not meet their criteria towards their local responsible finance provider, rather than allowing them to enter high cost credit agreements with less than ethical providers.
Let’s all work together to get this right. If we do, UK Plc will soon enjoy improved productivity and economic growth, no matter the firmness (or lack thereof) of Brexit.
FOUNDATION EAST IS LOOKING TO PROVIDE LOANS AND BUSINESS SUPPORT TO MICRO AND SME BUSINESSES IN THE EAST OF ENGLAND WITH VIABLE BUSINESS PLANS.
IF YOU KNOW ANY, PLEASE PUT THEM IN TOUCH!
FOUNDATION EAST NEEDS YOU!
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