The UK is home to 5.5 million SMEs, which form an important part of our economy. After a difficult few years and the current slew of macroeconomic pressures, there is an increased need and demand for borrowing from UK SMEs, in many cases, this is not to achieve growth but as a matter of survival. However, major banks in the UK have shown a significantly reduced appetite to lend to small and medium-sized businesses.
There is increasing concern within the UK business community over the availability of funding, especially for smaller businesses, and the short and long-term effects this will have both on business failure and growth rates. Particularly at a time when businesses have limited cash reserves and reduced margins.
A recent survey of UK finance brokers that deal with SMEs found:
With the outlook for the domestic and global economy still unclear and macroeconomic pressures predicted to remain high this reduction in funding presents a real threat to the UK SME sector. Business energy rates will likely be keenly felt in SME failure rates in 23/24; whilst energy prices are predicted to fall, as wholesale prices already have, one million UK SMEs negotiated fixed cost contracts at their peak and will not benefit from this decrease.
Colin Goldstein, Commercial Growth Director at iwoca, said, ‘With brokers predicting that the impact of current macroeconomic pressures this year will be worse than the pandemic for small businesses, it’s clear that SMEs across the UK are in need of financial support. And as our data shows, traditional banks just aren’t offering this.
This trend of decreased lending to smaller business can be seen to have started when interest rates started to rise in late 2021 and was felt keenly throughout 2022. Last year UK SME lending fell by £14 billion, from £209 billion in 2021 to £195 billion.
At the same time lending to larger business from the major banks actually increased by £14.7 billion, going from £322.1 billion in 2021 to £336.8 billion in 2022. Unsurprisingly at a time of major economic upheaval, major banks saw loans to established, larger and higher turnover companies as less of a risk.
The series of bank collapses in early 2023 further spooked major banks, especially that of Silicon Valley Bank (SVB) which specialized in funding high-risk tech start-ups. SVB suffered from what is being called the first social media bank run, as stories of its imminent collapse spread like wildfire and caused its tech-savvy customers to panic.
It is the role of social media in this collapse, rather than the collapse itself, that has struck fear in the financial sector. The rapid transmission of information, factual or not, and the lack of regulations around this has shown that banks are operating in a new world that is not fully understood or legislated for. There is currently an increased need to be seen as being financially sound and prudent.
Will Senbanjo, Partner at Altenburg, said, ‘During times of economic stress we often see banks pivot away from small business in favour of lending to SMEs in favour of lending to bigger businesses. Until the economic picture starts to become less uncertain, smaller businesses are likely to find bank lending harder to come by.’
In truth, it is mixed. Given current economic projections, it is unlikely that banks will increase their willingness to lend to smaller businesses in the short to mid-term. Further uncertainty is being caused by the UK Prudential Regulation Authority’s plans to change bank capital rules in line with the Basel 3.1 Prudential Standards. This would increase the level of risk weighting that banks need to apply to SME lending, with current lower risk weighting being their main incentive to SME lending, therefore making it harder for SMEs to borrow. This is predicted to remove up to £44 billion from the SME lending market between 2024 and 2026 should it be introduced.
Whilst major banks may be an increasingly unlikely source of funds for UK SMEs, challenger banks offer some hope. The majority of these institutions lack the capital to pursue lending to big business and SMEs are their target market. Tempted by the recent success of some challenger banks, especially tech-based ones, an increasing number of players are entering the market, therefore increasing the sectors lending capital available to SMEs.
In 2022, £35.5 billion was lent to SMEs by challenger banks and this accounted for 55% of all SME lending. Whilst this increase does not yet account for the decrease by major banks, it does show that appetite does exist in the wider business community.
Asset financing remains a realistic and successful option available to SMEs, with applications still being largely successful. In 2022 a record £22 billion in assets finance was lent to UK small and medium businesses.
Whilst there are options available to directors of SMEs seeking funding, the reality is that overall, it is currently harder to come by and economic pressures are not expected to relent in a meaningful way. Ultimately, this is likely to result in a high number of insolvencies and an increased risk of bad debt. However, SME directors that are able to make every penny count and avoid risk as much as possible stand the best chance of not just surviving but achieving growth.
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