The significance of the UK’s small and medium-sized enterprises (SMEs) is well acknowledged, with approximately 5.5 million SMEs employing over 16.5 million individuals and contributing to more than 48% of business turnover. However, the full potential of these enterprises can only be realized through the establishment of a conducive ecosystem that addresses their lending needs. The government’s ‘Small Business Access to Finance Call for Evidence’, initiated in March, aims to tackle the persistent barriers SMEs face in accessing affordable finance. This initiative seeks to inform policy changes that will help meet the government’s ambitious growth targets.
The Evolution of the Lending Landscape
In the wake of the 2008 global financial crisis, SME lending was dominated by the four largest banks. However, a significant shift has occurred, with non-traditional lenders now providing 60% of annual gross bank lending to SMEs by 2024. Since 2014, 36 new banking licenses have been issued to SME lenders, indicating a diversification in the lending market.
Despite these developments, the UK lending landscape still falls short in supporting the growth ambitions of current and future SMEs. The appetite for both seeking and providing credit has waned. The UK displays one of the lowest borrowing levels by non-financial businesses among G7 countries as a percentage of GDP, a structural deficiency that limits investment, productivity, and long-term growth.
Challenges in SME Lending
A significant challenge is overcoming the stigma associated with debt, as many businesses with growth ambitions face discouragement from lenders’ limited appetite for risk. The Bank of England’s 2024 SME Finance Survey revealed that 77% of SMEs prefer slow growth over borrowing to expand rapidly. Additionally, 60% of businesses are holding back on investment to prioritize cash reserves.
Moreover, the UK’s shift towards a service-oriented economy, where services account for 81% of GDP, poses challenges for SMEs. These businesses often lack tangible collateral, limiting their borrowing options and potentially restricting growth opportunities.
The SME Lending Review
The government’s SME lending review seeks to address these challenges, although it has received limited public attention. If executed effectively, it could be transformative. The review provides an opportunity for the industry to outline how existing policies meet the needs of businesses and the lending sector, and where further government support is required.
Building a Collaborative Ecosystem
Unlocking growth for SMEs requires collaboration within the financial sector. This involves fostering partnerships between established banks and specialist lenders, combining the trust and risk management capabilities of big banks with the personalized approach of newer, tech-enabled lenders.
Furthermore, embracing embedded finance can streamline the lending process, allowing SMEs to secure financing seamlessly during transactions. Collaboration between lenders can also broaden access to diverse financial products, ensuring businesses have the necessary funding when needed.
Looking Ahead: Invest 2035 Industrial Strategy
The forthcoming Invest 2035 industrial strategy presents a significant opportunity. Set to outline a 10-year plan for fostering investment in high-growth sectors, this strategy aims to create the conditions for increased investment, quality job creation, and impactful community development. However, SMEs need access to funding to leverage this opportunity fully.
The UK’s SMEs are rich with potential, and their innovation and determination should inspire confidence in the government’s growth targets. Yet, businesses require a supportive ecosystem to realize their ambitions.
Note: This article is inspired by content from https://www.leasinglife.com/comment/finance-is-the-missing-link-in-the-uks-sme-growth-strategy/. It has been rephrased for originality. Images are credited to the original source.