Beyond the bank: Are we asking the right finance questions for SMEs?

The term “squeezed middle” is often used in the context of the UK economy, and it’s true of our mid-sized growth businesses too. We speak to these companies daily, and we know intimately the numerous places they’re feeling the pressure. But there needn’t be a squeeze on their options to grow.

The OECD ranks Britain third globally for our ability to support fledgling businesses, yet we’re ranked thirteenth in our ability to scale high-growth firms.

Most scaling companies will look to the banks first when they need financing, and the number of these companies that walk away with the advice or capital they need is dwindling. Many are asking why the banks aren’t lending to SMEs. But is this asking the right question?

First, let’s deal with the why. Banking Circle’s recent white paper – The Epic Business Loan Battle: SMEs Fighting for Finance – suggests that nine out of 10 SMEs need to access finance. These companies are pushed towards taxdeductible debt financing, and over half of UK businesses are unable to access the funds they need to grow.

Ultimately, there’s an increasing aversion to debt. The UK’s largest survey of attitudes to financing – the SME Finance Monitor – finds that the proportion of permanent non-borrowers among SMEs has risen from a third to a half in the last six years.

SMEs are less and less inclined to borrow. The government identifies this as a problem rather than seeing it for what it really is: a fundamental attitude shift amongst founders.

Trust in banks never recovered from the financial crash, and many businesses have had bad experiences with debt. An entrepreneur’s business is their baby and debt is not a permanent form of capital.

There is a simple answer. We need to look beyond the banks for finance. A recent report by the British Business Bank suggests that UK SMEs are diversifying in their choice of financing. The question now is how do we make a case for equity?

Our ongoing campaign Ambition Nation surveyed over 1,500 SME founders; the resounding revelation is that they simply do not know where alternative financing is sourced. Ambition Nation is leading the charge to get that information out there and arm chief executives with what they need to make the right fundraising choices.

But the government can help; indeed, FinnCap recently penned a letter to the chancellor, off the back of our work on a new guide to the UK scaleup landscape – Way To Grow: How Funding Can Accelerate Scale – recommending a number of policy changes.

We can suggest one easy legislative solution: extend the government’s Bank Lending Referral Regulations. This requires banks to refer companies which have been refused credit to Treasury-approved alternatives, and has already helped SMEs access alternatives to bank lending.

We would implore the chancellor that imposing a similar obligation on banks to refer companies to alternative, nondebt sources of finance (such as selected specialist SME corporate finance houses) could help transform and ease the squeeze on our scaleup ecosystem.