Banks must not turn off funding tap to small firms and stymie economic growth, says FSB

Banks “pulling up the drawbridge” to small firms will further stifle economic growth, according to a new report showing that lending to this part of the economy has reached an all-time low.

The Federation of Small Businesses (FSB) has today revealed the study finding that fewer than one in ten such firms applied for finance in the first three months of this year, the lowest proportion since the quarterly Small Business Index began.

Additionally, applications that received the green light also hit a record low, at 43 per cent, while those describing the availability of credit as “good” – about a fifth – reached its lowest point since 2016. One in ten small firms – equating to more than half a million – plans to close, sell up or downsize over the coming year.

FSB national chair Martin McTague said: “Lenders pulling up the drawbridge for small firms will threaten our already faltering economic recovery. Businesses are born every day across the UK – many need funding to get off the ground, ensuring they reach a stage where they’re profitable and creating opportunities.

“A lot of those who’ve worked tirelessly to adapt, survive and thrive over lockdowns need finance too, empowering them to take their firms to the next level, driving our economic recovery and the transition to net zero in the process.

“A big chunk of what little finance is being accessed is being used to manage cashflow challenges as our late payment crisis worsens, rather than for much-needed investment and innovation.”

Indeed, of the few firms that did manage to secure finance, four in ten intend to use credit to manage cashflow, considerably more than the numbers planning to use funds for equipment updates (21 per cent), expansion (19 per cent) or recruitment (4 per cent).

FSB national chair Martin McTague says funding is crucial both for new firms and those that have survived lockdowns. Picture: contributed.

Of those that applied for finance, about six in ten sought traditional overdraft and/or loan products. A quarter applied for asset-based finance, such as invoice finance, with smaller numbers seeking funds through peer-to-peer platforms (7 per cent) and/or crowdfunding (5 per cent).

Contrast

The FSB cited the latest Bank of England figures showing the annual growth rate of lending to small and medium-sized enterprises reaching a record low, but the business group, which says it is the largest in the UK, said that in contrast, lending to big corporates has leapt since the start of the year.

Firms have been struggling to repay cash lent to them by government support schemes such as the coronavirus business interruption loans and bounce-back support loans. In Scotland, more than £4.1 billion has been loaned to around 100,000 businesses, and it has been forecast that some £1bn is likely to go into default.

The FSB also revealed that about six in ten of the 1,200 respondents said they were affected by late payment of invoices during the first three months of this year, with a quarter seeing the problem as worsening.

Mr McTague called for a “culture change”, with lenders “taking an objective approach to small business finance and big corporates putting best supply chain practice at the heart of environmental, social and governance programmes”.

The result would be a “win-win”, he added – “strength in corporate supply chains and a thriving small business community driving economic growth from the ground up”.