Four ways to improve access to SME finance

A survey conducted by payments provider Sonovate revealed that 26% of UK enterprises were struggling to access finance through traditional banks. Additionally, nearly 40% of respondents expressed dissatisfaction with their main bank's lack of understanding of their business needs.

The Federation of Small Businesses (FSB) released a report called "Credit Where Credit's Due" which indicated that less than two in five small firms find the process of seeking traditional loans straightforward. Furthermore, only 38% feel they can easily find answers to their questions about applying for finance.

The Institute of Chartered Accountants in England and Wales (ICAEW) has put forward four proposals to open up access to SME finance. 

Raising awareness of SME finance

Research has shown that limited awareness and lack of advice pose significant challenges for SMEs seeking finance. Business owners may not be aware of the available funding options. Initiatives like ICAEW's Business Finance Guide, created in collaboration with the British Business Bank and leading providers of business finance, aim to raise awareness and provide guidance on different forms of finance and government support.

However, structural issues persist despite these efforts, particularly regarding the limited sources of advice accessible to SMEs. Owners often rely on trusted individuals they can meet in person, such as bank staff. But as banks have shifted their operations post-Covid, closing down branches, SMEs are losing a valuable source of personal advice and support during the application process.

Banks and industry organisations like UK Finance can do more to drive awareness and educate founders about different avenues for SME finance.

Government support

Initiatives such as tax credits or enterprise zones could assist SMEs in achieving short-term growth, making banks more willing to provide long-term support.

Fundamentally, banks are commercial organisations, and their risk assessment determines whether SMEs are granted traditional loan funding or high-interest costs. Any increase in the cost of a bank's funding, such as interest payments mandated by the government, puts pressure on the bank to pass on the cost to customers or accept reduced profit margins.

Macroeconomic factors also play a role in the scarcity of SME finance. The changing business cycle and increased bank rates have led to higher interest rates for SMEs compared to a few years ago. While finance acceptance rates may be reasonable, the associated costs are more burdensome than in the past.

New technology

Open banking technology can help bridge funding gaps by allowing non-bank lenders to evaluate creditworthiness based on customers' data. Emerging UK lenders have suggested implementing an SME Funding Passport containing standardised and easily shareable data for lenders to assess funding applications.

ICAEW’s Financial Services, Banking and Insurance Manager Simon Gibbs, says: “One advantage that banks have always had is that if your business has been with a specific bank for some time, that bank can instantly see all your transactions and assess your creditworthiness on an ongoing basis. 

“With open banking, the customer’s data becomes much more portable – opening up the field for non-bank, alternative and other non-traditional lenders to make those sorts of evaluations.”

Invoice financing

The changing nature of SMEs calls for appropriate finance options. Invoice factoring with discounting allows finance providers to access real-time trade data and sales invoices to determine safe lending amounts against incoming payments. This approach can speed up cash flow and facilitate faster scaling for modern SMEs.

ICAEW’s Head of Financial Services Reuben Wales, says: “Many newer SMEs are tending towards business models with no hard assets. In other words, you don’t need an office or fleet of vehicles – you can just set up shop with a laptop. That’s a different proposition to what we had in the past, whereby the lender would look at your assets, and you would offer up certain holdings as security and collateral.”

The next step

If you have any questions regarding this insight, please contact Alison Price, or your usual UHY adviser. 

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