The Sme Lending Landscape

Salvador Garcia Andres, CEO at Ebury

Earlier this month, the Competition and Markets Authority (CMA) recommended that Britain’s most recognisable high street banks be subject to a full competition inquiry, after finding that major banks do not meet the needs of small and medium size enterprises (SMEs). The CMA observed that the level of competition and variety of service among major banks was poor, to the extent that only 4% of SMEs change their banks each year.

Importantly, the CMA’s ruling could lead to a break up of several of the most prominent names on the high-street; a strategy which could potentially offer business managers greater choice, but could result in greater tariffs. It should however provide small and medium businesses with a range of opportunities, and so this news has been welcomed by business leaders and politicians.

The lending landscape

Salvador Garcia Andres

News last week that the British economy is now stronger than in 2007 demonstrates the extent to which businesses have grown since the nadir of the financial crisis, when many SMEs struggled with access to credit. This is encouraging for business leaders eager to take advantage of new opportunities, and overcome a lending landscape hardly conducive to growth. As it stands, many of the UK’s major high street banks seem to present little in the way of choice for business leaders, with many unable to see any real difference between offerings.

Major banks are required to hold larger amounts of capital against SME loans, making it expensive for them to lend. The additional capital requirements, together with regulatory overhead make it an unprofitable hassle to deal with small and medium businesses. That is particularly counterproductive today, now that signs of an improving economy are visible, and business require capital to capture growth.

The Government’s perspective

It seems that the challenges facing SMEs are becoming noticed within the corridors of power. Earlier this year, Skills and Enterprise Minister Matthew Hancock announced that SMEs will be at the ‘heart’ of the Government’s long-term economic plan, amid a flurry of news examining the reasons behind Britain’s ‘sluggish’ recovery. Leading Government figures, often reluctant to clamp down on the banking industry, are now calling for several of Britain’s largest banks to be broken up.

Some have also voiced concern over the perceived lack of competition among SME lenders. FSB chairman John Allan has criticised the relative clout of the largest banks and the lack of choice available to SMEs, in addition to the barriers to entry for alternative financiers. CMA’s announcement looks to have been welcomed by stakeholders, who hope it may incentivise Britain’s biggest banks to improve their offerings to SMEs.

Options for SMEs

This also chimes with April’s “Trends in Lending” report from the Bank of England, which outlined the SME lending landscape, and identified a gap in which alternative financiers can develop. This is great news for SMES, which stand to benefit from a new range of financing options that are overlooked by high street banks. Britain’s growth remains slow despite an improved outlook and SMEs have an important role to play in countering this trend, while lenders have a responsibility to support them.

The Government has put SMEs at the heart of its long-term economic strategy for a good reason. Ambitious business leaders should be able to grow their workforce, their revenue, and their operations in new markets internationally.  As alternative financiers continue to take advantage of the gap left by banks reluctant to support SMEs, the time is right to increase the availability of credit to business leaders, in a manner which matches the increasingly complex needs of global SMEs. It looks like alternative finance will be instrumental in supporting small and medium businesses growth, and indirectly the government policies – probably even more than the banks.