Call to improve financing landscape for small firms amid 'concerning' picture around current access - FSB

Action must be taken to improve the financing landscape for small businesses to avoid “potential devastation”, according to a new report that has uncovered a “concerning” picture around access to what is the lifeblood of such firms.

Two thirds of small firms plan to make some form of investment in their business by 2024, but just under half feel they are fully aware of different types of financing options available, according to the Federation of Small Businesses (FSB)’s new report titled Credit Where Credit’s Due. It is calling for steps to “stop the lending gears from grinding to a halt” as was the case after the 2007 credit crunch and if repeated would “risk undermining the country’s economic recovery”.

The trade body found that three in five small firms have applied for finance over the past five years, and small and medium-sized enterprises (SMEs) are now collectively carrying around £36 billion more in debt than they were in January 2020.

However, the success rates of finance applications have dropped “precipitously” since the Covid loans era, with under half of applications successful in the third quarter of 2022, compared with a pre-Covid success rate of nearly 64 per cent – and the smaller a business is, the less likely its request for finance is to be approved, the FSB added. The interest rates offered to small business customers have also risen, with nearly a third of small firms who applied for finance between July and September of this year offered a rate of 10 per cent or above, the report also found.

In light of the findings, the FSB – which recently said the “tenacity and determination” of small businesses in Scotland will be key to trading it out of recession – is urging the UK government, financial regulatory bodies and other stakeholders to take action to improve the financing landscape for small businesses, to give them more choice and clarity around their options.

Recommendations

Suggested such steps include The British Business Bank encouraging the use of the Bank Referral Scheme, where lenders are required to share details of SMEs they reject for finance, so those businesses can be approached by alternative lenders, and expanding the number of banks and approved alternative lenders in the initiative. Also recommended is The Start Up Loans scheme being expanded from 11,000 to 15,000 loans per year, to prompt more people to try their hand at entrepreneurship, for example.

Martin McTague, the FSB’s national chair, said: “Our report pulls together various strands which together add up to a worrying picture of potential devastation, if the situation is allowed to drift. There is, luckily, a lot that can and should be done by the government and by other bodies to improve the funding landscape for small firms, getting productive capital into businesses with enormous potential for growth.

The FSB has stressed the need to get essential funds to the small businesses 'who will transform them into new products, new jobs, and new premises'. Picture: Getty Images/iStockphoto.

“Ultimately, small firms are looking for signs that they won’t be punished for looking to invest and expand. We’ve set out a comprehensive programme which would transform small businesses’ finance options, boosting economic growth and empowering entrepreneurship – it’s now up to the government to move from words to deeds, to get vital funds to the small businesses who will transform them into new products, new jobs, and new premises, providing fresh hopes of recovery amid the economic gloom.”