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New government SME funding scheme still not enough

23rd May 2019 By Katy Ford in Current Affairs

Why we must all continue campaigning for fairer access to finance for the region’s smes…

Following the British Business Bank’s announcement at the end of April of an additional £300m SME loan funding, the Banking Competition Remedies Fund, set up as part of the RBS bailout package in 2008,has agreed £425m in grants to challenger banks and FinTec companies to enable them to establish banking services for SMEs that address the service issues experienced by customers of the big five banks. With grants of £15m made to both Investec and the Co-operative Bank, and £50m to Nationwide Building Society, it looks like some of the UK’s legions of small businesses are going to have a wider choice of banks  with whom to work. Having a wider of choice of banks with whom to work though, will do little to help the hundreds of micro, small and social enterprises in the East of England that turn to our responsible finance industry for support each year. Here’s why…

New SME lenders are driven by profit

Let’s just take a step back and consider all of the innovations that have taken place in financial services since 2008. This has included the emergence of alternative lenders, who, along with the big five banks, are driven by profit and service the needs of anonymous shareholders, rather than the needs of their customers, (with perhaps the exception of this recent addition of Nationwide, a mutual society.  

New government funded referral platforms cost these new SME lenders to join and these costs are passed on

Add to this an array of government funded referral platforms, where lenders bid for business and pay for the privilege, and you begin to get a picture of how the journey for SMEs that don’t fit the box has become even more complicated than it was before all this innovation started.

New government funding for SME lenders focusses on enabling infrastructures, not increasing capital available to loan

And let’s not forget that this latest initiative from The Banking Competition Remedies Fund focuses on enabling banks to create an infrastructure for SME services, rather than on increasing the capital available to lend. Even if it leads to increased capital in due course, it will do nothing to help those who will not meet the lending criteria because, for example, they have erratic trading histories or no assets.

Why SMEs still need the Responsible Finance sector to support them with business advice and finance

This is where Responsible Finance Providers (or Community Development Finance Institutions as they are often known) come in.  We are social enterprises. We are not driven by profit. Rather, we are driven by a need to improve the social and financial inclusion of people who are excluded because of race, ethnicity, gender, location, credit history, trading history or lack of assets.

Responsible Finance providers are driven by a need to improve social and financial inclusion, not profit for anonymous shareholders

Our sector has a proven track records of success. Last year alone, we lent £85m to 5,310 businesses creating 4,490 new businesses and 20,370 jobs, a 27% increase on 2017. Yet, we are ourselves excluded from accessing funds from sources such as The Banking and Remedies Fund, or many of the other government initiatives, because we are not big enough or innovative enough, or maybe just because the current government doesn’t really care about the market place we serve.

Foundation East has been helping SMEs in the Eastern region who do not tick the boxes of mainstream lenders for 15 years

Access to finance is a well-publicised issue facing the SME community. In the Eastern region alone, there are 259,000 micro and small businesses doing their bit to keep our economy afloat, yet a large percentage of them can’t get affordable funding to enable them to achieve their goals. This is because, often due to poor credit history or lack of assets with which to secure a loan, they simply do not fit the box of mainstream or pseudo mainstream lending institutions.

These latest banking sector innovations are not democratizing access to finance

With this latest announcement from the Banking Commission’s Remedy Fund following so close to last week’s from BBB, we fear that campaigners for fair access to finance will take their foot off the accelerator because it’s easy to assume that the banking sector is finally hitting the spot in terms of democratising access to finance for small businesses.  It’s not.

Responsible Finance is the only sub-sector of the UK’s banking system that is truly focused on democratizing access to finance 

Like all Responsible Finance Providers, Foundation East’s purpose is to ‘create community benefit’. As such it takes a longer-term view when making lending decisions than other finance providers. Looking beyond a computer screen and set of tick boxes, Foundation East pays greater attention to the business plan and the people behind the business. So long as it thinks the plan is viable and the people have the right skillset and mindset to implement it, Foundation East will provide business loans and support to micro, small and social enterprises across the East of England. In fact, it has been doing so for 15 years and the success stories of its 612 clients are testament to the value it creates.

Foundation East creates £15 in social and economic impact for every £1 it spends on supporting the region’s SMEs

Furthermore, for every £1 Foundation East spends on providing its lending and support services to excluded small businesses, £15 is created in social and economic impact, as explained in this short animation and this economic impact report.

Our commitment to the East of England’s SMEs

We will work closely with local Nationwide, Investec and Co-Operative Bank branches to ensure they signpost those small businesses that they are unable to help to Foundation East.

We will also continue to encourage businesses and individuals who recognise the positive social impact of enabling excluded micro, small and social enterprises to set up and grow in the Eastern region, to invest in Foundation East’s Community Investment Tax Relief (CITR) shares. As well as helping excluded SMEs, the CITR tax incentive enables the investor to offset 25 percent tax relief on the money they invest over a five year period. Whilst not risk free, it is less risky than some alternative SME lending options including SEIS, EIS and SITR

When people or businesses purchase Foundation East CITR shares, 100 percent of their investment is lent to SMEs, microenterprises and social enterprises across the Eastern region.

To find out more, download an investment prospectus. 

To invest, visit www.foundationeast.org/invest

  • About the Author
    Katy Ford

    Katy Ford

    Katy’s knowledge of community finance is extensive, having worked for Foundation East since its inception in 2004. She is recognised locally as an influential business leader by the Suffolk 100 and nationally, as a founding member of AskIf, an online network of community-based lenders. Previous to moving across to community finance, Katy was the treasury manager for a large insurance company. She also has experience as a SME owner, having run a small hotel.

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