High street banks pull back lending to small firms as funding gap widens
High street banks are pulling back from lending to small and medium-sized enterprises (SMEs) while demand for capital is set to rise, according to a survey of more than 100 brokers.
The poll, conducted by fintech firm iwoca, found 83 per cent of SME finance experts believed major banks were becoming more reluctant to fund small firms, marking the fourth consecutive quarter where more than eight in 10 held such a view.
Meanwhile, 82 per cent said SME demand for capital would rise in the next six months.
The Treasury Committee has launched an inquiry into SME lending to scrutinise access to funding, regulation and whether the government could do more to support business growth.
More than half of brokers surveyed by iwoca (51 per cent) held a negative opinion of high street banks.
Three quarters of experts predicted that major banks would continue to reduce SME access to working capital over the next year.
“Sticky inflation means SMEs are focused on short-term funding to help them through this period. Against this backdrop, high street banks are reducing their appetite to lend to the UK’s 5.5 million SMEs – so the funding gap is widening,” said Colin Goldstein, commercial growth director at iwoca.
“This research demonstrates in the clearest possible terms that SME funding options are being stripped back – better suited lenders can and must step into the place of traditional banks. Small and medium-sized businesses need our vital financial support on the long road to economic recovery.”
MPs heard evidence on Wednesday from the Federation of Small Businesses (FSB) and the British Chambers of Commerce that proposed regulatory changes will hinder specialist lenders.
Under plans from the Prudential Regulation Authority as part of the implementation of Basel 3.1, favourable treatment for SMEs will be removed.
Tina McKenzie, policy chair of the FSB, told City A.M.: “With the lending environment so tough for small businesses, the Bank of England should make sure it gets Basel 3.1 regulation right – current proposals could make it significantly harder for banks to lend to small firms by removing the so-called SME supporting factor. Its loss would encourage lenders to be even more conservative when considering small firms’ finance applications.
“We’re also concerned about the rise in banks demanding personal guarantees for even relatively small business loans, as these are a strong deterrent to small business owners looking to grow. It’s understandable for banks to want to counterbalance lending risks, but we feel the imposition of personal guarantees has become too onerous.”
The brokers surveyed by iwoca submitted more than 2,700 applications for SME finance collectively in a four-week period in September and October.