Confusing bank and government business lending is leaving many SMEs unable or unwilling to secure loans, a report by the National Audit Office has revealed.
Securing finance is still an issue for many smaller firms, even during a time of economic recovery, when output prices, materials costs and wages tend to increase and businesses require capital to expand or take on new work.
The NAO report found that the potential “funding” gap between the amount of finance available to SMEs and the amount they actually need is currently £10bn to £11bn, and could reach about £22bn by 2017.
Many SMEs are struggling to provide potential lenders with the collateral or evidence of a track record they require to predict likely future performance. This is a particular problem for SMEs less than five years old, which had bank loan applications rejected in around 38% of cases, while the figure for SMEs over five years old is only 19%, said the report.
The report found that SMEs were most likely to turn to their bank when they needed external finance, particularly for working capital, even though bank lending to SMEs involves capital charges up to five times higher than other forms of lending.
"Initiatives such as Funding for Lending and the recently launched Business Bank, designed to make financing more accessible for small businesses, are failing to help construction SMEs because the banks remain reluctant to lend to them."
Brian Berry, FMB
But many viable SMEs are deciding not to seek finance, either as a result of a more cautious approach to expanding their business, or a conviction that they will be unsuccessful in their attempts, said the report.
The Department for Business, Innovation and Skills runs six main schemes, under the umbrella Access To Finance, designed to provide finance guarantees, loans and equity support designed to fill the gaps left by high street lending.
But the NAO report found a significant amount of the financial support associated with the government-backed schemes involved the banking sector. And although BIS has taken steps to better explain to SMEs the options available to them in financing their business, the report found that these sources of help were not particularly easy to find, and there was some overlap in the online tools that may have caused confusion.
Responding to the report’s findings, Brian Berry, chief executive of the FMB, said: “Initiatives such as Funding for Lending and the recently launched Business Bank, designed to make financing more accessible for small businesses, are failing to help construction SMEs because the banks remain reluctant to lend to them.
“Many small business owners are confused about which finance schemes they can access. We know from our members that banks, including those backed by Funding for Lending guarantees, are discriminating against companies operating in the construction sector.”
Berry added: “Unless the government acts now to unify and simplify the schemes on offer, as well as stamp out discrimination against building firms applying for the loans and overdrafts they need to buy materials, hire plant or take on extra staff, then the opportunities presented by the improving economic conditions will be lost.”
