The Treasury Committee has launched a new inquiry into small business access to finance and lending for small and medium-sized enterprises (SMEs) lending. The cross-party Committee of MPs aim to explore how the government can improve the lending landscape for small businesses.
Contending with a global pandemic, multiple lockdowns, increasingly unaffordable bills and rising interest rates all within the last five years has been the unfortunate reality for small businesses in the UK. These challenges have made it very hard for businesses to survive and, many, haven’t.
In Q1 2022, the UK saw 137,210 businesses close – a 23 per cent increase in closures compared to Q1 2021. All industrial groups saw an increase in closures apart from agriculture, forestry, and fishing. But challenges haven’t just impacted business survival, it has also hurt business creation.
The number of businesses added to the Inter-Departmental Business Register in Q1 2023 was 22 per cent lower than in Q1 the previous year – and the lowest level of Q1 business creations since the start of the data series in 2017.
While monetary challenges continue to impact hundreds of thousands of businesses, in May 2022, the Bank of England revealed that the annual growth rate of borrowing by SMEs fell to -5.1 per cent – a record low for the series; which began in April 2012.
A government inquiry into small business financing
With such significant issues impacting small businesses across the UK, the Treasury Committee is set to examine the key challenges for SMEs seeking finance, how small business lending is regulated, and the role the government can play in enhancing lending to these businesses.
The inquiry will also investigate the role of financial innovation in business lending, the impact of the Bank of England’s Term Funding Scheme, credit reference agencies, covid schemes on businesses, and the role of the British Business Bank.
Harriett Baldwin MP, Chair of the Treasury Committee, commented on the inquiry: “SMEs are the lifeblood of local communities, powering economic growth and fostering innovation and an entrepreneurial spirit.
“As a Committee, we’ll be examining whether small businesses are able to access the finance they need to grow and develop, whether there is adequate regulation of the sector, and if the government can take a more active role to support business growth.”
The Committee is currently inviting written evidence submissions on the inquiry terms of reference.
“Ensuring no SME gets left behind”
Anna Roughley, head of insight at the Lending Standards Board (LSB), discussed the importance of ensuring positive outcomes for small businesses in the UK:
“SMEs have had a relentlessly difficult few years. As the pandemic that barred many from trading petered out, business owners were walloped with rapid inflation and a subsequent rise in interest rates.
“These factors had the pincer effect of squeezing margins and reducing the spending power of would-be customers. The road to recovery for SMEs has proved to be long – and bumpy.
“The LSB oversees the only set of Standards for banks and lenders that are designed to ensure good outcomes for SME customers, even during the most challenging landscapes. Now, more than ever, the industry must ensure the focus is on ensuring no SME gets left behind,” Roughley explained.
She also outlined the need for the financial sector to drive financial inclusion for all parties: “There is a large cohort of SME lending customers who would define themselves as either having a disability or a long-term medical condition. Out of the country’s working-age population, 33 per cent report having a long-term health problem, 20 per cent a disability and eight per cent a severe disability. It is important this cohort receives the support they may require in accessing business banking, which is why we have worked with registered firms and lenders extensively over the last year, ensuring they are driving financial inclusion for all.”
“The chronic underfunding of SMEs will have severe economic consequences”
It is already clear that if work isn’t done to improve access to finance for small businesses, the SME landscape will continue to worsen. In turn, this could have a catastrophic impact on the UK economy.
Khalid Talukder, co-founder of foreign exchange service provider DKK Partners, offered his take on the potential consequences of not quickly stepping in to support SMEs. He explained: “The chronic underfunding of SMEs will have severe economic consequences if we fail to act. This inquiry needs to get to the bottom of why accessing credible financial support is such as challenge in the UK compared to other parts of the world.
“Fast-growing companies need finance to hire talent, develop their product offering and compete in the global arena. Key to this effort should be encouraging international trade and giving them access to the latest payment technology to allow them to operate in dynamic emerging markets. Otherwise, will fall behind rapidly as other countries take the initiative hence harming our own economic growth.”
Steven Mooney, CEO of FundMyPitch, said: “The lack of access to funding for UK entrepreneurs warrants a parliamentary inquiry and more. SMEs make up the vast majority of businesses in the UK, spreading opportunity, skills, and employment, yet so many of them aren’t taken seriously enough by investors and the big banks.
“In tough economic times with trading costs surging, getting financial backing is make or break for many of these innovative companies. This inquiry needs to explore the mechanisms in place to enable valuations and allow up-and-coming companies to have a platform to reach the investors they so desperately need to drive growth for the long term.”