SME financing – how is it changing?

 In Small Businesses & Startups

Since the financial downturn first began to take hold in 2008, SMEs have found it harder to secure financing for their own recovery and growth plans. At that time, banks resisted Government pressure to increase lending, severely limiting SME growth – and arguably slowing the recovery of the wider economy in the process.

Banks changing their rules

Seven years later, the Bank of England’s research suggests that banks are now reassessing their lending rules, making more finances available to small businesses. Entrepreneurs could be rightly confused about why this change in policy has taken so long – particularly as the government’s flagship Funding for Lending Scheme (FLS) has already been in operation for two-and-half years. This research is welcome news for Whitehall, who had been facing accusations that the FLS had been an expensive failure – lending during 2014 had fallen by a further £2 billion on the previous year.

SMEs changing finance sources

However, there seem to be more changes involved on the SME’s side too. Business intelligence agency BDRC has released statistics showing that just under 50% of SMEs are refusing to take bank funding. Similar to the government’s own strategy, these companies are choosing to cut costs, put off growth plans and use cash reserves to pay down existing debt or remain completely debt free. They seem also to be seeking alternative finance providers – for example, venture capital or private equity investments – to cut out the need for banks.

It is important to remember that more than half of SMEs are still borrowing from banks, and application approval rates have now risen to 76%. Ultimately those businesses that want to borrow to fund growth now have a better chance of being able to do so. But the outcome of the financial downturn has changed the SME finance landscape – perhaps permanently.

 

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