Opinion

UK banks are the biggest barrier to SME growth

4 min read

26 September 2014

The economy is picking up, businesses are hiring more people and entrepreneurial spirit is rife. So why is it so difficult for startups and small businesses to secure the vital funding they need to prosper?

We’re forever being told that SMEs are the backbone of the UK economy and the government is busy setting up local and national schemes to encourage entrepreneurship and enable people to go it alone. But if these fledgling businesses are going to stimulate growth as the government wants, they need the finance to support it.

With reports last month that the Funding for Lending Scheme recorded another poor performance and SMEs actually repaid the banks more than they borrowed in the second quarter, it’s clear the current set-up for securing investment just isn’t working. Not only has Vince Cable openly admitted this, but the most recent figures for the FLS speak for themselves. Net lending to SMEs was flat or worse among 24 of the 36 participating banks. Nationwide fared worst, with net lending to SMEs at -£501m in the second quarter, followed by Clydesdale, at -£439m, and RBS at -£360m.

The FLS and the concept of matched funding are redundant in a market where solid, collateralised startups routinely can’t raise the funding they need to match. If banks continue to make lending decisions based on credit alone, they’ll stifle the growth potential of the UK’s startup scene and in doing so, cap the economy’s growth. The banks are simply too conservative to adopt new approaches to lending as perceived risk always stands in the way. But businesses are risky by their very nature, and an overly traditional, risk-averse attitude does businesses, and especially start-ups, no favours.

Fintech startups for example are regularly unsuccessful in their attempts to secure finance, because the banks’ old-school approach does not sit well with the vibrancy and optimism of the tech start-up scene. Despite my business passing due diligence repeatedly, we were turned down by three of the major UK banks, forcing us to look elsewhere to secure the necessary funding. The fact that we have since received funding from PNC, an American bank, shows that we have more than enough security to satisfy a lender’s requirements, they just needed to take the time to understand our solid business model.

But business people and entrepreneurs are nothing if not innovative. Research has found that as many as one in three SMEs is actively looking at alternative ways to finance their business, with 20 per cent admitting that their current source of finance isn’t flexible enough to meet their needs.

A lot of startups and small businesses have turned towards crowdfunding sites or angel investors to secure the necessary funding; and smaller companies providing further financing routes. This kind of finance structure is the future: relatively small finance companies working in specific niches with the relevant experience and sector knowledge. Through knowing what their industry needs and applying it, these businesses will be able to tailor products and solutions that will be far more attractive to potential customers than any off-the-shelf solution the banks typically offer.

As the economy continues to pick up, by the time the UK banks regain confidence in us, we’ll have moved on. We’ve seen the funding alternatives that are available to us increase over the last few years and this trend is set only to continue – especially if the banks carry on restricting access to the finance required to ensure the future growth of the UK start-up scene and of the wider economy as a whole.

Richard Prime is CEO and co-founder of Sonovate.