How Much Has The Lending Landscape Changed For SMEs In The Last Five Years?

The last five years has been a tumultuous period for small and medium sized enterprises (SMEs) in the UK. The financial crisis has affected all businesses regardless of size, though certain types of company have been able to respond and recover much more easily. This is partly due to the fact that larger businesses have the resources to protect themselves, the cash flow to insulate the company from temporary problems, greater insight into how to recover, and, in many cases, are also protected by ‘the too big to fail’ stigma.


Smaller businesses, on the other hand, inhabit a much more precarious space and are far more likely to struggle and fail when times get hard. As SMEs continue to struggle, particularly in regards to borrowing, we’ve decided to take a look at exactly how the lending landscape has changed for SMEs over the last five years.


Tightened Credit Restrictions

Though policy makers and politicians have spoken continuously on the subject of how the UK is recovering, or ‘the verge’ of recovery, SMEs have actually seen credit restrictions tighten since 2008. As banks try and minimise their exposure to risk, it has been the smaller businesses that suffer. This has been particularly tough on lower risk SMEs, who have been disproportionably affected by the banks’ unwillingness to lend to higher risk SMEs. The situation has only been exacerbated by the government’s insistence that the new publicly owned banks be risk-averse, minimising the extent to which these institutions are ever going to be able to loan to SMEs. The tightened credit restrictions imposed by many banks have also remained in force despite the extension of the government’s Funding for Lending Scheme (FLS).


No Increase In Rejections

Interestingly, there hasn’t actually been an increase in rejections for lending over the last five years. However, this can largely be attributed to low confidence amongst SMEs and a reluctance to even approach banks to request help with funding. The fact that SMEs feel actively discouraged from applying for borrowing is an important indicator of change, as traditional banks have, in the past, been an incredibly important force in the sector, as well as the only real means of funding. This disillusion with the banks does suggest that SMEs are having to, or will soon have to, look towards alternative sources of finance.


Rise In ‘Challenger Banks’

This search for an alternative means of funding has already begun and, in the last few years, found expression in the rising popularity of so-called ‘challenger banks.’ These smaller alternatives to the traditional high-street banks have appeared to carve themselves a niche in the market that caters for SMEs looking for quick funding. Claiming to focus on concerted efforts to understand a small business, its operations and future plans, these banks are set up to lend to small businesses. Their presence in the market does suggest that there are alternatives emerging in the lending landscape, though their lack of exposure and public and industry awareness may limit the size of their impact.


Most Recent Drop In Lending

The most recent information to emerge from government figures actually suggests that the actual amount of lending to small businesses has dropped over the last few months. The month of May saw a decline in lending estimated to stand at £0.5bn, while a fall of £0.7bn was registered for April. Unless drastic changes occur to encourage a return to SME lending, there will be no other choice but to look beyond traditional means of funding and to new ventures, such as the new Business Bank being promoted by a number of experts and analysts.


There can be no doubt whatsoever that SMEs have had a particularly hard time over the past five years and enterprises of this size are struggling to find the help necessary for business recovery and new growth.  


While changes have occurred over the past five years and the lending landscape has been altered, it has remained incredibly difficult for SMEs to borrow from any source.


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