Partner Article

More credit options key to small business growth

Mike Cherry, policy chairman of the Federation of Small Businesses, looks at credit issues faced by small businesses.

Businesses up and down the country may have cause for celebration, as recent data appears to show that the recovery is gradually being placed on a sustainable footing. Encouraging figures have been released in the last month by the International Monetary Fund showing that the UK is growing the fastest of any G7 economy, while the British Chambers of Commerce’s (BCC) quarterly survey showed that the service and manufacturing sectors are experiencing record highs in sales and orders.

It’s a similar story among small businesses too, the majority of which are looking to expand by spending more on recruitment and equipment in the next year. But what isn’t mentioned in the optimistic coverage is a potential stumbling block; lack of credit. In order to realise their ambitious expansion plans, small businesses are going to need loans, and there’s evidence to suggest that many of them are still struggling to get the credit they need.

Banks have risk profiles that set out the sorts of businesses that they will lend money to, which can often be narrow enough to exclude large numbers of companies. In fact, according to figures from the Department for Business, Innovation & Skills, over half of first time loan applications are rejected. There are of course, challengers to the ‘big five’ high street banks; alternative lenders are often more geared to supporting small businesses through flexible forms of credit, but the big banks still account for the majority of lending.

The Government has weighed in to support small businesses, announcing a measure to refer small firms that have been refused credit to other possible lenders at the Federation of Small Businesses’ National Conference earlier this year. But lenders’ attitudes aren’t going to change overnight - some banks are also preventing others from lending to SMEs by taking too long to waive securities they have on existing loan arrangements, or failing to complete documents required for second charge borrowing.

We need to show that initial rejection does not have to be the end of the road for SMEs. The BCC and FSB believe that if we can create a system in which flexible forms of credit are available, such as allowing the state-backed business bank to lend directly to businesses for example, both mainstream and alternative loan providers can exist side-by-side. As part of this support for SMEs, the BCC and FSB, with backing from HM Treasury will be developing a valuable resource tool for information on banking and lending services, which will allow banks to understand their customer base better, and improve their business offering in the long-term.

While credit conditions have eased over the past 12 months according to the Bank of England’s Trends in Lending report, the latest figures show that demand for finance by small firms is outstripping supply. As the economy continues to gain momentum, ensuring that viable firms have access to finance is critical. The Government needs to press ahead with reforms to the banking sector, and more non-bank sources of finance need to be encouraged to increase competition and choice.

This was posted in Bdaily's Members' News section by Federation of Small Businesses .