UK ministers convened with top bank executives on Tuesday to address the pressing issue of small business lending, amid growing concerns that many enterprises are struggling to secure the necessary funds for growth and investment. The meeting aimed to align the banking sector with the government’s economic growth strategy, particularly in the wake of criticisms regarding the accessibility of credit for small and medium-sized enterprises (SMEs).
Key takeaways
- Ministers are urging banks to increase lending to SMEs to support economic growth.
- Current loan approval rates for small businesses are below 50%, a significant drop from 67% in 2018.
- The government is considering imposing obligations on banks to facilitate easier access to loans.
- Many SMEs are turning to high-risk private lenders due to difficulties in obtaining bank loans.
The current lending landscape
The meeting comes just days before a review of SME lending practices concludes, with ministers contemplating potential regulations to ensure banks provide more accessible financing options. Rachel Reeves, the Shadow Chancellor, expressed concerns that stringent lending criteria are hindering the growth potential of SMEs, which are vital for the UK economy.
A report from the Department for Business and Trade revealed that the average loan approval rate for SMEs has plummeted to less than 50%, down from 67% in 2018. This decline raises questions about the reasons behind such high rejection rates and whether they are justified.
Challenges faced by small businesses
Small business leaders have voiced frustrations over banks’ restrictive lending practices, which often include:
- Personal guarantees: Many banks require personal guarantees from business owners, increasing the risk for entrepreneurs.
- Centralised decision-making: The shift away from local branch managers to centralised systems has diminished personal relationships and trust.
As a result, many small businesses have resorted to borrowing from high-risk private lenders, as traditional banks appear unwilling or unable to meet their financing needs.
Government’s response and future plans
A government spokesperson highlighted the challenging environment for businesses in recent years, stating that the government is committed to improving conditions for small enterprises. They aim to collaborate with banks to enhance access to finance, enabling businesses to scale and explore new markets.
Bank representatives are expected to affirm their readiness to increase lending to SMEs, but they stress the need for the government to expand its loan underwriting schemes. Currently, the British Business Bank backs 70% of loans to qualifying small businesses, but industry lobby group UK Finance argues that more funding is necessary to encourage banks to lend more.
The role of mutual lenders
Gareth Thomas, the Minister for Small Business, who chaired the meeting, expressed frustration over the disconnect between SMEs and local bank branches. He advocates for the support of mutual lenders, which have proven effective in providing business loans in other countries, such as Germany.
An all-party committee of MPs has previously highlighted the detrimental impact of unfair banking practices and stringent financial regulations on small businesses. Their inquiry revealed that many SMEs have faced significant challenges over the past five years, exacerbated by the recent energy crisis and high inflation rates.
Concerns about debanking
Another pressing issue discussed was the phenomenon of "debanking," where banks close customer accounts without adequate explanation. In 2023 alone, 140,000 SME accounts were reportedly shut down, raising alarms about the stability and support available to small businesses in the UK.
As the government and banking sector continue their discussions, the outcome of this meeting could significantly influence the future of small business lending in the UK, potentially paving the way for a more supportive financial environment for SMEs.
