Tom Blacksell

Tackling the UK’s ‘invisible’ business challenge

Anyone who has ever started a business, or worked for a young company trying to grow, will know just how challenging it can be. More than 600,000 start-ups are created in the UK every year. The early years of trading can be the most precarious, when directors are finding their feet, searching for new clients and often funding to keep their business moving forward.

Accessing business loans and trade credit requires a strong credit history, but so many SMEs have not been trading long enough to create a footprint or be required to file full accounts.

More than 1.6 million UK businesses can struggle to access growth funding or trade credit because there is insufficient information available about their financial track record. This lack of credit information means these small or medium-sized enterprises (SMEs) can be considered higher risk when it comes to lending.

These ‘SME invisibles’ are either too new to file their first set of accounts, or only submit a balance sheet which doesn’t include profit and loss. As a result, they may struggle to access the growth funding needed to take their business to the next level, or even trade credit to buy products and materials.

This is a challenge that’s not easy to solve. However, progress has been made in recent years by finding new and appropriate data sources to work with. Through this work, we have already seen a reduction in the SME invisible population by almost half. At Experian, we think that Open Data can help us reduce this to zero by enabling businesses to contribute their own information, so they can thrive and contribute to our economy in even greater numbers.

There are an estimated 4.4 million live incorporated businesses registered with Companies House, however 700,000 of these are not currently trading so have no requirement to access finance. Some 200,000 more businesses file full accounts which include profit and loss figures, so have ‘thick’ credit files with enough information for lenders to confidently make credit decisions.

We’ve helped take this SME invisible population of 3.5 million and reduced it to 1.6 million by adding new data sources. These sources include credit account information and, more recently, current account turnover.

We estimate that around 300,000 SMEs that would previously have struggled to access credit due to lack of information will see their credit scores improve when this information is considered, to the extent they will no longer be perceived as high risk by lender. Open Banking technology also provides small businesses with faster access to funding by eliminating much of the paperwork required to apply for finance and allowing SMEs to share bank transaction and management account information with a lender within minutes. It also reduces the risk for lenders and the cost of serving SMEs.

By using these new data sources, lenders and trade credit providers can make a more accurate assessment of businesses seeking finance. It will help support a significant part of the UK economy, with SMEs producing a turnover of more than £2.2 trillion each year, any support we can provide to help them succeed and grow in an often-challenging macro-economic climate must be priority for the year ahead and beyond.

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