£6bn gap for those outside mainstream finance

In 2011, mainstream banks made £75bn of loans to small and medium enterprises, according to the CDFA’s “Mind the Finance Gap: Evidencing demand for community finance” report. Between September 2011 and August 2012, banks and building societies combined provided £7bn of overdrafts and loans and £137bn of credit card lending to individuals.

However, the report found the current potential annual demand for community finance in the UK – from businesses, civil society organisations, individuals, and homeowners – to be between £5.45 and £6.75bn. For small and mid-sized businesses in particular, there is an estimated potential finance gap, which is not currently covered by mainstream finance, of £1.3bn and 103,000 clients per annum.

Community Development Finance Institutions (CDFIs), which provide loans and credit charged at non-exploitatives rates to underserved markets unable to secure mainstream finance, currently provide £100m per annum into this finance gap.

They did so in finance gaps where continuing market failures are well-documented and, most especially, where investment markets fail to reflect the economic and social returns generated for the UK economy and society.

Evidence suggests that the long run funding gap for micro-businesses and SMEs remains, has become harder to negotiate, and continues to be served by a set of undercapitalised CDFIs, many of whom remain some distance from financial sustainability.

Reduced lending by mainstream banks has seen the finance gap expand “upwards” (i.e. previous bankable entrepreneurs and SMEs are now facing access to finance difficulties). Arguably it is some of these businesses that are the recipients of expanded and new short-term loan market provision, such as asset based finance and pay day business lending.

New market developments to meet growing demand include crowdfunding, expanding asset-based finance and other short-term loan provision. They remain an emergent and potentially substantial source of provision to a broader spectrum of SMEs than those who have recently become underserved – but barriers to development remain.

The CDFA report insists that the scale of unmet demand can only be met through a partnership between public, private and social investors, who do share common economic and social objectives, through a viable and sustainable community finance system as an established and embedded feature of the UK’s financial landscape.

CDFA Chief Executive Ben Hughes commented: “The scale of unmet demand is staggering. This must act as a call to action to government, banks, funders and the broad community finance sector. The benefits of filling this gap are obvious: more business start-up and growth, more jobs, more people saved from the debt traps of high cost lenders and more wealthy vibrant communities.”

We will be exploring alternative ways of finance at Real Business Funding, the free conference to illuminate the new, more plural funding environment for growing SMEs. Join us on March 15, 2013, at the British Library, and join the discussion on Twitter at#unleashingfinance.

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