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Small and Medium-sized Enterprises (SMEs) in Britain need to overcome their reluctance towards borrowing money to boost their growth.

Small businesses in Britain hold the potential to fuel growth, yet this can only be achieved with a revitalized Small and Medium Enterprise (SME) finance sector, asserts Allica Bank CEO, Richard Davies.

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Britain's small businesses hold the key to economic expansion, but they require a revitalized Small...
Britain's small businesses hold the key to economic expansion, but they require a revitalized Small and Medium-Sized Enterprise (SME) finance sector, assertedly contends Richard Davies, Chief Executive Officer of Allica Bank.

Small and Medium-sized Enterprises (SMEs) in Britain need to overcome their reluctance towards borrowing money to boost their growth.

Powering Small Business Growth: A Call for a Rebooted SME Finance Market

Small and medium-sized enterprises (SMEs) play a pivotal role in the UK, contributing to 60% of employment and nearly half of the business turnover. Yet, they only account for 3-4% of the UK banking sector's £7 trillion total assets.

A thorough review of SME finance trends over the past four decades reveals a troubling pattern. The UK's standing, both in its own history and against international counterparts, is far from impressive. Bank lending, which has become increasingly slanted towards residential mortgage lending, is a significant factor.

Simultaneously, SME lending has become more focused on collateral-based lending. This has led to a growing shortage of financing that supports investment in productivity and growth. The consequences are dire.

The UK's low investment rate in the G7, stagnating GDP growth, and productivity are all cause for concern. An alarmingly low number of SMEs are seeking finance, with the UK standing out as an outlier compared to past lending application rates and international peers.

SMEs have developed an aversion to debt due to global financial crisis scandals and the perceived difficulty of accessing the market, especially for time-strapped small business owners.

A reboot of the UK's SME finance market is essential to meet the government's growth objectives. Our analysis suggests a £90bn gap in bank lending to SMEs since the global financial crisis. Despite growth in non-bank lending, there remains a total SME lending gap of up to £65bn against historical trends.

This lending gap has resulted in a significant decline in SME overdraft lending, which now represents only 5% of SME bank lending compared to 25% at the start of the century. SMEs with less than £1m turnover have experienced a 73% fall in overdrafts since 2000.

The shift in bank lending are influenced by regulatory, accounting, and business model changes, coupled with digital technology advancements. These shifts favour collateral-backed lending primarily in real estate, but are incongruous with the needs of the UK's modern service-led SME economy, where tangible asset ownership is low.

The rise of non-bank fintech lenders seeks to fill this gap, but these options are often costlier and can be challenging for business owners to find.

The result is a dearth of SMEs taking 'productive credit' to boost productivity and grow their business. The Bank of England's 2024 survey finds 77% of SMEs prefer a slower growth rate to borrowing.

To break this cycle, Allica Bank CEO Richard Davies proposes three actionable steps for the government and industry:

  1. Expand Growth Guarantee Schemes:
  2. Double the government-backed British Business Bank's Growth Guarantee Scheme and aim to increase it three or four times over the next five years. This can be achieved without additional costs to the taxpayer and should be heavily promoted to encourage disillusioned SMEs to try again.
  3. Bank of England Focus on SME Finance:
  4. Request the Bank of England to prioritize SME finance, as it did in the 1990s, and emphasize the role of challenger banks in the SME finance market. Smaller banks hold higher capital levels than major banks, partly due to uncertainty over future capital requirements and aspects of the prudential framework.
  5. Personalized Lending Solutions:
  6. Collaborate across industries to simplify the SME finance market. Leverage generative AI and renew traditional local relationship models (like those offered by brokers, banks, and CDFIs) to customize lending solutions to SME needs.

By breaking out of this cycle, the UK can breathe new life into its SME sector. Established SMEs are the catalyst for the next wave of economic renewal. The rewards for getting this right — a more dynamic, innovative, and inclusive economy that benefits every region in the country — are immense. Let's seize this opportunity.

Enrichment Insights:- Allica Bank CEO Richard Davies advocates for expanding government-backed Growth Guarantee Schemes, adjusting prudential frameworks, and creating a culture that embraces borrowing to promote SME growth 1.- Reducing the risk of lending to SMEs, cross-industry collaboration, and leveraging generative AI can enhance the efficiency and accessibility of SME finance solutions 3.- Efforts should be made to address the aversion to debt among SMEs to encourage borrowing to invest and grow 5.- Allica Bank has invested in technology to better support SMEs and advocates for policy changes, such as increasing the FSCS limit, to benefit businesses and accelerate SME finance reforms 2.

  1. The lack of financing for small and medium-sized enterprises (SMEs) in the UK has led to a significant shortage of investments that support productivity and growth, resulting in a stagnant economy.
  2. Despite the importance of SMEs to the UK, they only account for a small percentage of the total assets in the UK banking sector, while bank lending has become increasingly focused on residential mortgage lending.
  3. SMEs in the UK have developed an aversion to debt due to global financial crisis scandals and the perceived difficulty of accessing the market, which has resulted in a dearth of SMEs taking 'productive credit' to boost productivity and grow their business.
  4. To meet the government's growth objectives, Allica Bank CEO Richard Davies proposes expanding government-backed Growth Guarantee Schemes, prioritizing SME finance by the Bank of England, and collaborating across industries to simplify the SME finance market and customize lending solutions.
  5. The shift in bank lending towards real estate and away from SME lending is incongruous with the needs of the UK's modern service-led SME economy, where tangible asset ownership is low.
  6. The rise of non-bank fintech lenders seeks to fill the gap in SME lending, but these options are often costlier and can be challenging for SME owners to find.

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