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Access to finance: high hurdles for SMEs

Author: ICAEW Insights

Published: 26 May 2023

A combination of factors are hindering SMEs’ ability to access finance – but initiatives including government support, education about alternative finance, and new technology could pave a way forward.

For the UK’s small and medium-sized organisations, access to finance is a key determinant for growth. And yet a combination of research findings and anecdotal evidence from ICAEW members highlights the difficulties they face in accessing all-important funds. 

In September, a survey from payments provider Sonovate found that 26% of UK enterprises were having trouble with accessing finance through traditional banks. According to the same survey, almost 40% of respondents complained that their main bank doesn’t understand their business needs.

Three months later, Credit where credit’s due – a report from the Federation of Small Businesses (FSB) – showed that fewer than two in five (37%) small firms consider the process for seeking traditional loans easy, while only 38% feel it is easy to find answers to the questions they have about applying for finance.

On the other side of the coin, the British Business Bank’s SME Finance Survey published in March found that, while four in 10 SMEs expect to grow in the next 12 months (up from 21% in 2020 and 28% in 2019), one in five are concerned about their ability to make full loan repayments as and when they become due – highlighting the inherent risks that traditional lenders face in providing this type of finance.

Low awareness and limited advice

According to ICAEW’s Financial Services, Banking and Insurance Manager Simon Gibbs, business owners may not always be aware of the finance that is available to them – and the access challenge may vary, depending on the type of finance they need. “For example,” he says, “start-up capital and growth capital suit different purposes – plus, there are regional as well as sectoral differences for owners to navigate.”

Gibbs highlights a number of initiatives to boost awareness of funding options, including ICAEW’s Business Finance Guide. Produced in collaboration with the British Business Bank and the UK’s principal providers of business finance, it explains the different forms of finance, when each could be used, and signposts to government financial support. 

“ICAEW also runs the Business Advice Service, through which businesses can access a free consultation with a member firm. But despite those types of efforts, challenges remain,” Gibbs warns.

Among them are structural issues around the limited sources of advice that SMEs have on their radar. “Owners tend to rely on trusted individuals who they can meet in person, such as bank staff,” Gibbs says. “But as banks have changed how they do business post-COVID-19 and have closed down many branches, owners are losing a valuable source of direct personal advice and help with application processes.”

Declines or rejections by banks

Gibbs notes that fundamentally, banks are commercial organisations – and, for any SMEs that are turned down for traditional loan funding or are charged high interest costs, risk is the deciding factor.

“If the government says that a bank must pay interest on its deposits,” he says, “and that raises the cost of the institution’s funding, then the bank itself must either pass on that cost to its customer base or take a hit to its margins.”

Scarcity of finance amid economic climate

ICAEW’s Head of Financial Services Reuben Wales says macroeconomic factors are also at play. “We must consider where we are in the business cycle,” he says. “In 18 months, we have moved from a bank rate of less than 50 basis points to 4.25%.

“If you add on the credit risk premium that a bank would have to charge to cover the risk of providing lending, that explains why SMEs are looking at much higher interest rates than they would have been charged three or four years ago. So, while there may be reasonable acceptance rates for firms that want to take out finance, the associated cost will be far more onerous than it was in the past.”

Wales says that, in the current business cycle, businesses are expected to fail to some extent over the next 12 to 18 months. That will put banks under increasing pressure to calibrate their risk appetites accordingly.

In light of those hurdles, there are nonetheless potential solutions to easing the access to finance pressures that businesses currently face:

1) Awareness campaigns

One important task is to boost the knowledge base among SME owners about the financing options available to them. “That’s a structural point,” Gibbs says, “in terms of whether the banks themselves – or even UK Finance – could do more to drive founders’ awareness of the different avenues they could explore to access the finance they need.”

2) Whitehall initiatives

Gibbs notes: “If we say, ‘The banks should lend, but not hold as much capital in order to reduce risk,’ then the question becomes, ‘How do we reduce the credit risk of SMEs to bring them within the scope of banks’ risk appetites?’” 

Gibbs suggests that government initiatives such as tax credits or enterprise zones could potentially help SMEs grow in the near term, so that banks would be more willing to provide further support for the long term.

3) New technology

Open banking technologies could also help to address funding gaps, Gibbs believes. “One advantage that banks have always had is that if your business has been with a specific bank for some time, that bank can instantly see all your transactions and assess your creditworthiness on an ongoing basis. 

“With open banking, the customer’s data becomes much more portable – opening up the field for non-bank, alternative and other non-traditional lenders to make those sorts of evaluations.”

In January, a group of emerging UK lenders – including Funding Circle, Iwoca, Codat and Plaid – penned an open letter to Business, Energy and Industrial Strategy Secretary Grant Shapps, urging the government to consult with them about how to boost funding access for SMEs. 

One solution they proposed was the implementation of an SME Funding Passport, which would contain “consented, standardised and easily shareable” data on any firm looking for funding, which could be presented to a variety of different lenders.

4) Invoice financing

The changing nature of what SMEs look like indicates what sorts of finance options would be appropriate for them to explore. “Many newer SMEs are tending towards business models with no hard assets,” Wales says. “In other words, you don’t need an office or fleet of vehicles – you can just set up shop with a laptop. That’s a different proposition to what we had in the past, whereby the lender would look at your assets, and you would offer up certain holdings as security and collateral.”

As such, Wales explains, one path that a modern SME could take is invoice factoring with discounting, whereby the finance provider has real-time access to the firm’s trade data and sales invoices, enabling it to calculate the amount of working capital it can safely lend against incoming payments. 

“That may be quite helpful from the perspective of speeding up cash flow to the business,” Wales notes, “and could provide the necessary finance for scaling up faster.”

Further resources

A compilation of recent ICAEW guidance can be found at ICAEW’s Access to finance: supporting small businesses hub.

Insights Special: Access to finance

ICAEW Insights examines the finance options and support available to businesses, as well as the challenges they face in obtaining it.

Access to finance: supporting small businesses

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