The latest Small Business Finance Markets Report 2015 / 2016 from the British Business Bank reveals that alternative finance providers have increased their lending to SMEs by 75% to £1.26 billion in the year to October 2015. Yet despite this growth, the UK still needs to quickly develop a more diverse and accessible range of finance options to drive competition and choice for small businesses, the bank says.
Lending has also increased among banks whose lending to SMEs climbed 43% between October 2014 and 2015. It’s the first growth the sector has seen since the financial crisis, and banks remain the main source of finance for smaller businesses.
Finding funds still a problem
Access to small business funding is still an issue, according to the British Business Bank. With more than half (56%) of SMEs planning an increase in turnover in the next 12 months, being able to find suitable finance is critical. The bank also reports that many businesses aren’t scaling up. In fact, the Organization for Economic Co-operation and Development (OECD) research shows that British businesses are among the slowest to grow to more than 10 employees after 3 years. This, claims the report, is hampering UK productivity.
Also, with a record number of startups registering in the UK in 2015, and another record of 5.4 million smaller businesses operating in the UK at the moment, business owners need capital for expansion.
Schemes providing funding
The signs of a pick-up in lending from both the altfi and banking sectors are encouraging, says Keith Morgan, CEO of the British Business Bank. Although areas of financing still require attention.
He mentions the bank, which runs a number of initiatives to support financing to SMEs, is well placed to respond to the problem. Activities like early-stage angel funding and the Investment Programme, which provides £353 million to altfi providers to finance growing SMEs, are examples.
According to the report, there is a lack of regional finance options. More than 70% of SME equity investment goes to companies in London and the South East, making for an “uneven” funding landscape across the country. To rebalance growth in the UK, more choice of business finance is needed.
Morgan is optimistic about the bank's future initiatives:
Looking ahead, we have further exciting programs in the pipeline. We are piloting our innovative Help to Grow, a £100m programme, to support fast-growth businesses realise their potential. And we will play our part in supporting growth in the regions, most notably through the new £400m Northern Powerhouse Investment Fund announced by the Chancellor at the Autumn Statement. Keith Morgan, British Business Bank
Small Business Minster, Anna Soubry, calls small firms “the engine room of our country” but also expresses concern about limited financing:
Even though the lending landscape is improving, I’m well aware access to finance remains a big issue and want to see even more help for small firms looking to invest and create jobs for people. The government is taking steps to increase availability of alternative lenders like peer-to-peer platforms and challenger banks, through our support for the British Business Bank. Anna Soubry, UK government
Although awareness among SMES about various funding choices is improving, especially knowledge of peer-to-peer lending (up from 24% in 2012 to 40% in 2015) and crowdfunding (up from 13% to 49%), more than half of smaller firms go straight to their main bank for an injection of money. Business owners need to engage more with the funding market to fully appreciate the options.
Go the British Business Bank website for the full report.
Look at the Ultimate Guide to Business Funding for a comprehensive list of SME finance options.