Better education for small businesses about the range of external finance options available to them and a need to boost lenders’ ability and appetite to lend to smaller businesses are among the measures proposed by ICAEW to boost take-up of debt finance by the UK’s SME community. 

In its response to a government call for evidence on small business access to finance, ICAEW warns that smaller businesses are not seeking debt finance because they are dealing with more pressing challenges, including the tax burden, falling customer demand and availability of skills.

The call for evidence sought views on how well existing policies meet the needs of business and the lending sector in overcoming barriers to finance and how further support for the nation’s 5.5 million small businesses and the lending sector could stimulate much-needed economic growth.

Barriers to accessing debt finance

A ministerial foreword to the call for evidence says that despite progress in improving small business access to finance through a range of measures, “both finance providers and small businesses have highlighted barriers in providing and accessing debt finance”.

However, ICAEW warns that small businesses are put off exploring debt finance due to a lack of knowledge about the options available to them beyond more traditional debt products. They are also concerned about the costs and time involved in applying for debt finance, and the consequences of failure to repay. 

An ICAEW member quoted in ICAEW’s call for evidence response said: “There are small businesses 

taking out personal loans to tide their business over or for investments or due to cash-flow problems. They tend to favour personal loans due to the red tape and the expenses and time involved in taking out business loans.”

Business Growth Service focus 

In addition to an education campaign about how non-traditional types of debt finance can support growth, ICAEW also recommends that the focus for the government’s new Business Growth Service should be on under-represented and less well served businesses, including those founded by women and people from ethnic minorities. The Business Growth Service, due to launch “early in 2025”, will serve as a one-stop shop for government advice and support, to streamline the government’s offer to small companies and to assist businesses seeking to raise finance.

ICAEW has also suggested launching a business voucher scheme to help businesses pay for professional advice and identify the right finance and support for other needs. It also calls for loan guarantee schemes to be modified to support the cost of lending. 

In the aftermath of the global financial crisis, many more providers – including alternative providers and challengers – entered the debt market, increasing the choice and range of products available to small companies. The government has also supported developments in the debt market, including via the British Business Bank. However, ICAEW members report that the supply of some forms of debt finance is restricted due to lenders’ risk appetite or limitations on their access to data and business information. 

Address data-sharing issues

Accelerating the rollout of Open Finance in the UK, and an extension of the scheme for Commercial Credit Data Sharing, would help address some of those data-sharing issues, ICAEW says. ICAEW is also calling for a holistic review of regulatory barriers that might be holding back lending to SMEs. 

David Petrie, ICAEW’s Head of Corporate Finance, says the legacy of small businesses having their banking facilities withdrawn at the time of the financial crisis, or struggling to secure emergency loan facilities during the pandemic, had led some small businesses to choose to become non borrowers. 

“However, there’s also the age-old problem of a lack of knowledge of other options that may exist beyond overdraft and bank loans and the use of informal arrangements such as personal credit cards and other readily accessible forms of consumer finance. 

“Businesses may not consider debt finance because they feel that they can’t afford the associated cost or time it takes to apply for it. They also fear the consequences of being refused credit or not being able to repay if they are successful in securing debt finance, particularly if they have offered personal guarantees.”

High cost of credit

The British Business Bank’s latest report on small business finance found that risk aversion and the high cost of credit are key factors behind the lack of investment for smaller businesses. Although fewer smaller businesses are using external finance, the value of finance edged up in 2024. The report also says that finance markets are evolving to reach entrepreneurs from different backgrounds and in more places.

The fall in demand for external finance is against a backdrop of a general reduction in business and consumer confidence. According to ICAEW’s Business Confidence Monitor for Q1 2025, business sentiment turned negative for the first time in more than two years, falling to -3.0, the lowest reading since Q4 2022. 

“Tried and tested business practice tells us that a manageable amount of debt in a business is the most efficient way of achieving strong growth and that’s the rationale behind policymakers wanting to see an increase in the uptake of debt finance,” Petrie says. 

“If we want to move the dial on economic growth, we need a lot more businesses that are prepared to invest to allow them to invest and achieve their growth plans, whether that’s through hiring more people, investment in capital equipment, marketing, or developing new products and services.” 

Read ICAEW’s response to the government’s call for information on small business access to finance.