Access to Finance: Where do we go from here?

Access to appropriate finance to start and grow small and medium size businesses has remained a challenge throughout my career in the business finance sector, which now spans more than 45 years.  Despite some notable attempts to address the issues, a well-known gap has existed in access to debt finance up to £250,000 and has always been more of a problem for early growth and those businesses in the parts of the sector known as micro enterprises with under 9 employees.

As micro businesses account for over 80% of the whole stock of UK businesses, and when added to small (up to 50 employees) make up 99% of UK businesses, you would expect more policy involvement from the public sector in support of the jobs which can be created and preserved.

Recognising the issues, ART Business Loans was established almost 25 years ago as a Community Development Finance Institution (CDFI), with the aim of filling gaps in support provided by the banks, offering loans from £10k to £150k, with an open-door policy to all and incorporating a mission to target underserved areas and communities including ethnic minority businesses (EMBs).

Interesting recent research (Ethnicity and Bank Lending Before and During COVID-19 Cowling, Liu, and Conway June 2021) which examined the supply and demand for finance for EMBs has re-confirmed our own experience over many years.  That is, any businesses that cannot meet the requirements of the banks in terms of their own stake, security, or information, are most affected when it comes to accessing the finance they need to survive and thrive.

After the banking crisis, considerable efforts were made by the Government to encourage ‘alternative finance’ providers and a more competitive banking market.  Many new alternative providers emerged.  However, very few of these targeted the micro business sector and provided smaller loans and many have now moved, over a period of time, to providing much larger debt facilities.  The banks remain by far the largest supplier of business finance and the same hard-to-fill gap in the market persists.

During the period pre COVID-19, most of the concentration in supporting gaps in access to finance was on growth businesses, equity, and larger amounts even when the public sector intervened nationally or locally.  In challenging economic times, the supply of finance to small businesses decreases, especially that provided by the banks.

The COVID-19 pandemic has, however, seen a different dynamic enter the equation.  With unprecedented support from Government, banks provided with a 100% guarantee were able to provide very cheap loans under the Bounce Back Loan Scheme (BBLS).  Loan approval rates went up – not much of a surprise as BBLs were provided using a self-certification from customers and were very widely used.  It meant that more loans (1.56m, totalling £47.36bn) under the £50k maximum for BBLs were made to small businesses in nine months.  This was more than would previously have been made in a similar period to the entire SME market.

The BBLS initiative was essential and enabled many businesses to survive.  However, the support has, in my opinion, potentially distorted the market and also jeopardised future borrowers’ access to appropriate finance.

So what next?

The challenge now, and in the critical months ahead, will be what happens as we move away from the earlier schemes:

• We have already seen a considerable tightening by the banks in the use of the new Government supported Recovery Loan Scheme, which does not carry a 100% guarantee.
• As businesses turn to alternative and additional finance providers, where are those lenders in turn going to find the money to lend?  The Government has provided guarantees under the recent COVID-19 schemes, not the funds to lend.  So the lenders will have the same problems as their clients – access to appropriate finance!  We are already seeing some alternative and additional providers becoming more selective and excluding some sectors, for example hospitality and retail.
• Whilst welcoming the budget announcement that the RLS will be extended for six months, the reduction in the guarantee to 70% is surprising and could well have unintended consequences in reducing bank lending under the scheme even further. Tucked away in the report from BBB is the first indication that in six months total lending under the scheme is just over £1billion….it would be interesting to see a breakdown on size of loan delivered and by whom.
• Businesses that have borrowed more and on easier terms than usual will be under pressure to exhibit to lenders that they are able to service both existing and future borrowing, particularly if their trading record has suffered.

Somewhat disappointingly, concentration in the public and banking sectors is returning to the focus on larger businesses and those with high growth potential.  Very little attention is being paid to the micro end of the small business market.

Perhaps surprisingly, policy, and of course promotion and publicity, tend to focus on start-up businesses.  The Government’s own start up loan programme (loans up to £25k) does provide below market rate finance to individuals starting businesses, although this is in the form of a personal loan.  Little thought or effort has gone into ensuring that follow on finance is available after that to support businesses until they reach the point where they meet the banks’ criteria for business lending.  This can lead to use of inappropriate finance including personal credit cards, loan sharks, even pawn brokers – none of which are helpful in the long term. This gap in the market needs to be given some serious consideration if we want to encourage enterprise and enable micro businesses to create and protect jobs in the future – and hopefully support the much vaunted ‘Levelling Up’ agenda by getting capital into underserved markets and supporting truly local economic growth.

The clearest revelation that has emerged from the recent events I have attended (in person and online) has been that it will need to be the private sector that leads the way in terms of investment and any new initiatives, as diminishing resources are available in the public sector.  In my opinion, more effort needs to be put into exploring ways in which the private sector, and in particular the banks, can support local economies by using the existing policy tools of the public sector including the Recovery Loan Scheme guarantee.  Or we could look ‘across the pond’ for inspiration.  In the United States banks are encouraged to provide assistance using US Treasury guarantees and CDFIs to fill the gaps left by a purely commercial approach to business finance.

What better place to start a collaborative new approach than in the West Midlands, where some of the UK’s first banks and early CDFIs were established?

Dr. Steve Walker is the Chief Executive and a Director of ART Business Loans (ART), based in Birmingham, a Community Development Finance Institution (CDFI) that was established in 1997 to help to ‘alleviate poverty through enterprise’. ART became the first locally targeted CDFI of its type in the UK, using a mixture of public and private sector funds.

He joined ART prior to its official launch, leaving his role as Senior Corporate Manager at Barclays Bank following 29 years of service in the West Midlands.

He has received recognition on numerous occasions, including both an Honorary Doctorate and Honorary Research Fellowship from the University of Birmingham, in 2007 and 2016 respectively.

He is considered an authority on business finance and regularly writes and speaks on the subject. He has acted as a business finance adviser to the UK government, and served upon the advisory non-departmental Small Business Investment Taskforce from 2000 to 2006, in addition to other local support roles.