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Small Businesses Still Struggling to Access Alternative Finance

alternative finance options for small businesses

According to a new report from the Federation of Small Businesses (FSB), restricted access to alternative finance options for small businesses is restricting UK economic growth.

Greater competition and awareness needed in funding market

The report, Going for Growthshows that just 13% of small firms are currently applying for external finance, with more than 68% being offered lending rates above 4%.

It also highlighted the fact that a lack of competition within the small business banking sector is an ongoing and serious issue. 70% of those that applied for finance in Q3 of 2018 sought a bank loan or overdraft facility. The UK’s four largest banks (RBS, Barclays, Lloyds and HSBC) still control 80% of the commercial loan market. 68% of small business owners say they have no awareness of equity finance.

“Despite being a decade on from the crash, we still have this dangerous combination of weak appetite for, and low awareness of, alternative finance options, high borrowing costs and inadequate support for small firms that are turned down by banks,” said FSB national chairman Mike Cherry.

“Too many small business owners approach the big lender they’ve always dealt with as a first port of call when asset, peer-to-peer or equity finance could be a much better match for them.”

The report shows that the Government’s Bank Referral Scheme, which directs small firms denied bank finance to alternative funding matchmakers, is not proving effective. Since its 2016 launch, only 902 (4.7%) of the 19,000 firms referred through the initiative have gone on to secure new finance.

Mike Cherry said the scheme is vital but “falling short of the mark,” and that banks should be made to ensure they do all they can to make SME owners they reject aware of other funding routes.

“Referring rejected small business owners shouldn’t be a box-ticking exercise. Big lenders should be made to work to meaningful targets,” he said.

Going for Growth stresses that Open Banking (allowing business owners to grant third parties real-time access to their banking data) is key to enabling greater access to alternative finance options. The FSB is calling on the Government to work in partnership with industry to embark on an Open Banking awareness-raising campaign targeted at small businesses, promoting its potential and allaying security concerns associated with it.

Mike Cherry said that while the British Business Bank is striving to improve the situation, more needs to be done—and that Open Banking holds “massive potential.”

“Having real-time access to accounts will make it easier for finance providers and investors to identify the right routes for clients and make decisions swiftly.”


Gender and ethnicity gaps—and the Brexit threat

There are also some groups of small business owners who find it significantly more difficult to secure funding. The report found that women business owners, those from black and minority ethnic (BAME) backgrounds and those based outside London and the South East find it particularly difficult, with 43% of female business owners describing the accessibility of new credit as ‘poor’ compared to 38% of male business owners.

“We know that women and BAME business owners face a number of additional barriers when it comes to accessing finance for growth,” said FSB national chairman Mike Cherry, who wants to see a mentoring initiative that provides support for all groups that face barriers to funding.

The FSB also warns that a chaotic no-deal Brexit would further restrict access to small business finance, pointing out that the European Investment Bank (EIB) put more than £3 billion into small business finance markets between 2006 and 2016 and backs the £400 million Northern Powerhouse Investment Fund (NPIF) and £250 million Midlands Engine Investment Fund (MEIF).

Mike Cherry warned that suddenly losing access to the EIB would “rattle small business finance markets,” making it even harder for small firms to access new funding and stifling productivity and growth in the wider economy.

The answer? To ensure EU funding streams are immediately replaced after Brexit, preferably by expanding the role of the British Business Bank (BBB). However, while Mike Cherry welcomed the Chancellor’s Brexit contingency plans for the BBB at last month’s Budget, he said these plans should be a last resort.

“The goal should still be to secure a transition period as part of an ambitious Brexit deal that works for all small firms.”

Are you fully aware of all the funding options for your business, or do you tend to head straight to your bank? Do you feel you’ve struggled to access finance due to your gender or ethnicity? Share your experiences.

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