Lack of access to finance for the UK’s 5.9 million SMEs, particularly working capital, has long been seen as a barrier to growth. Over the past 20 years this has led to numerous policies aimed at increasing access to finance at both the national and the regional level for growth. 

In September, the APPG on Fair Business Banking published a report which concluded that policies to address the unequal access to finance in different parts of the country are an overlooked aspect of the government’s levelling up agenda.

Levelling up SME finance is difficult because the banking system is concentrated, centralised and non-relationship based, with SME lending dominated by the largest, centralised banks which do not develop long-term, supportive relationships with business customers. Schemes aimed at increasing the supply of equity capital to SMEs often had a bias towards London and the South East.

There had been a long-term decline in lending to SMEs since the financial crisis and prior to the pandemic the only growth in SME lending had come from smaller lenders, challenger banks and peer-to-peer lenders. The pandemic led the government to introduce three COVID SME loan schemes including the Bounce Back loan scheme. 

Many businesses have certainly survived with the help of the schemes. But many also face an uncertain future and the FSB reports that the share of its membership with debt describing their borrowing as “unmanageable” has soared from 13% to 40%. The NAO was concerned that the largest banks could strengthen their foothold in the market as they provided 89% of the funds under the Covid loan schemes.

As the UK economy recovers from the pandemic, maintaining and increasing the supply of SME finance to all regions of the UK is seen as vital for meeting the forecasts of unprecedented economic growth and the government’s ambitions for levelling up.

Policy interventions on SME lending which could support levelling up include:

• Altering the incentives on larger and challenger banks to lend to specific regions and ensuring that all national schemes for the availability of SME funding have a regional aspect.
• Turbocharging the growth of challenger banks, changing regulation and extending the term funding schemes to non-bank lenders.
• Promoting the growth of regional institutions like regional banks, mutuals and CDFIs to provide a strong local finance option for every business and strengthen the role played by relationship-based lending. 

This topic is explored in more detail across the October and November editions of Banking Focus. Sign up to the Financial Services Faculty for more details.