This £4bn problem is stunting SME growth

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We need to draw attention to the growing range of options and make it easier for companies to compare all the types of finance (Source: Getty)

Every year, tens of thousands of small businesses see their loan applications refused by the big banks.

In fact, figures from the British Business Bank (BBB) indicate that this amounts to around £4bn in loans annually – a staggering figure when you consider that this is preventing businesses from being able to reach their full potential.

SMEs are expected to contribute £241bn to the British economy by 2025, up 19 per cent from last year’s figure of £202bn, according to research from challenger bank Hampshire Trust Bank and the Centre for Economics and Business Research.

Read more: Why alternative finance is now mainstream

So we shouldn’t underestimate how important SMEs are to the economy. And yet many companies are in dire need of finance, which is stunting their growth, and hindering job creation in the process.

There are worries that this gap could get worse if the UK government fails to replace the billions of pounds in funding which the European Union pledged to give small businesses up until 2020. The chair of the Federation of Small Businesses, Mike Cherry, even warned that companies across the country are “staring into a business support black hole from 2021”.

That’s not to say the big banks aren’t lending. It’s just that they’re lending to the larger businesses with a long track record of profitability – a consequence of the financial crisis which has prompted more red tape and an overhaul in capital adequacy requirements.

Peter Alderson, managing director of non-bank B2B finance provider LDF, comments: “There’s a lot of talk around this subject currently, but the true reality of the issue remains that UK businesses remain massively underfunded, and there’s still far too many businesses not knowing where to turn after a bank rejection – this needs to change.”

But many business on the smaller end of the scale are left out in the cold and unsure of where to turn.

While there’s a growing range of alternative funding routes to choose from, such as private equity or alternative finance and peer-to-peer lending, a rejected loan from one of the mainstream lenders doesn’t automatically mean businesses will look elsewhere for finance.

In fact, according to the BBB, there’s still a large group of smaller businesses that give up or cancel plans on being rejected by the first finance provider they have contacted. This proportion has remained fairly constant at around 38 per cent between 2012 and 2016.

Alderson comments further: “Small businesses are without doubt, the backbone of our economy, so the idea that they aren’t getting access to the finance they need to progress is worrying, it’s a real barrier to economic success. As a provider of alternative finance to small businesses, we see many businesses in this situation. They are often strong, established firms, with great ideas, they just need the support of a provider who can put these requirements into context. It’s important to get to know these businesses and fully appreciate their requirements. This one-to-one support is essential, as their needs are often too large or too diverse for a tick box.

If the banks can’t offer the loan, surely there needs to be a better referral system in place to direct small firms to find the right type of finance elsewhere?

But what’s worse is that one in five businesses are put off even trying to get a loan because of the perceived issues with the borrowing process – a view created by the bureaucracy of the big banks which means getting finance is a long-winded and complicated affair.

We need to draw attention to the growing range of options and make it easier for companies to compare all the types of finance. After all, it’s the businesses of the future that are at stake here.

Read more: Coping with the cocktail of issues facing SMEs