UK-based business bank Allica is urging the government to fix the SME finance market to help revive UK economic growth and productivity, after it found that SMEs are applying for external finance less than ever before in new research.
With the UK having the lowest business investment rate in the G7, the Allica report highlights how small businesses are only investing at a third of the level of large corporate businesses, with a clear link between low levels of SME finance, low investment, and weak economic growth.
The research reveals several long-term trends, including an up to £65billion gap in SME credit, that have developed since the financial crisis, with a significant build-up of SMEs being discouraged from seeking finance for their business.
SMEs applying for external finance have fallen markedly from 65 per cent in the late 1980s to just 25 per cent between 2022 to 24, with the UK now having some of the lowest application rates for finance from SMEs in recorded history, and the lowest application rates recorded internationally by the OECD.
Evidence also shows that SME loan rejections have risen from between five to 10 per cent three decades ago to 40 per cent today. Separately, the Bank of England’s 2024 SME Finance Survey found that 77 per cent of SMEs say they would prefer to grow slowly rather than borrow to expand.
Bank lending has increasingly shifted towards collateral-backed lending, primarily real estate, but also hard assets such as vehicles and equipment. As the UK’s economy has shifted more towards the service sector (now over 80 per cent of the economy), most companies no longer have these types of assets.
Allica’s new research also highlights a dramatic collapse in SME overdraft lending by banks. Overdrafts made up 30 per cent of all SME finance in the late 1990s, but sit at just five per cent today, creating a critical working capital gap in the SME economy.
Turning the tide
“Our research makes for stark reading, revealing just how much the SME finance market has deteriorated since the 1990s, with record low application rates from SMEs combined with bank lending that‘s focused on low risk, well-collateralised lending that does not meet the needs of the modern UK economy,” explained Richard Davies, CEO of Allica Bank, who led the research.
“It’s a big positive that challenger banks have stepped up over the past decade and now provide more than half of new SME lending, but the evidence is inescapable that the overall economic outcomes from the UK SME finance market have substantially worsened over recent decades.
“When you see the data over the long term, it is shocking how poorly the current UK market performs compared to both our own history and other countries.”
To ensure this trend doesn’t continue, Allica Bank is urging the UK government to address these challenges if it is going to achieve its mission of economic growth. To reverse the decline and unlock SME growth, Allica Bank is calling for targeted measures:
- Doubling the British Business Bank’s Growth Guarantee Scheme, with a longer-term plan to scale guarantee schemes by three to four times, to align with similar schemes in the US, Germany and Spain. The expansion should be focused on credit that finances productivity and growth in SMEs.
- Charge the Bank of England and the Prudential Regulatory Authority with a specific SME finance and challenger bank focus, with a remit to review the detail of the prudential framework for SME finance.
- Prioritise a cross-industry push to improve SME finance discovery, investing in both generative AI and local relationship models to help businesses navigate an increasingly fragmented market.
