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Banks must back innovation, says Lancaster University

Lancaster University has warned that pioneering small firms are finding it significantly harder than their peers to secure funding for expansion, despite being “crucial” to jobs and growth.

The University’s Big Innovation Centre published a report that said banks are failing to lend to small, innovative firms, which highlights a fatal flaw in the financial system supporting the UK economy.

Figures showed that over a third of innovative small firms who sought finance between 2010 and 2012 were rejected, which is triple the rate between 2007 and 2008.

Lancaster surveyed almost 11,000 SMEs in its report, “Credit and the crisis: Access to finance for innovative small firms since the recession.”

It showed that access to finance for small and medium-sized businesses has worsened since the start of the recession, while over half of all SMEs looking for finance have faced difficulties, and one in four never received funding.

Dr Neil Lee, who authored the report, said: “The future growth of the UK economy depends on investment in new products and services. Yet it is harder for innovative small firms to obtain finance than their peers.

“A lack of finance for the firms which need it most will be a long-term drag on the UK economy. Without action from policymakers, banks are unlikely to change their lending behaviour.”

Published alongside a separate report in collaboration with innovation promoter, Nesta, the survey raised concerns around what Lancaster called a “long-term disconnect” between bank capital and investment in innovation activities.

This second report, “Two Spheres That Don’t Touch: The relationship between British finance and British innovation”, found that in the run up to the financial crisis, investment in innovation was falling as a proportion of total capital.

Between 2001 and 2007 banks increased total capital raised by £1340bn, while investment in innovation only rose by £26bn.

The report suggests there was a structural issue in the financial system, which contributed to the depth of the UK recession.

Author, Hiba Sameen, commented: “We would like to see government redoubling their efforts around finance for SMEs, particular those most likely to boost jobs and growth.

“The British Business Bank is taking steps in the right direction by promoting alternative sources of finance for SMEs, but its current scope and scale are too small to make a big difference in the finance gap for SMEs.

“The government needs to increase its scale by dedicating more capital to the bank, and also increase its scope by facilitating access to public corporate bond markets for SMEs.”

This was posted in Bdaily's Members' News section by Miranda Dobson .