Government officials summon heads of HSBC, Natwest, and Lloyds for discussions centered on small business lending.
Article Revision:
Struggling small businesses are facing hardships in securing loans, with senior executives from major banks like HSBC, Natwest, and Lloyds being summoned for a chat with ministers on this pressing issue.
Gareth Thomas, the minister for small business, will head the meeting, scheduled on May 8, following a report by the Department of Business and Trade in March. The report revealed that overall loan success rates for businesses applying for bank finance had plummeted below 50%, down from 67% in 2018.
As reported by the Guardian, this discussion comes before the government concludes its small business finance access review planned for May 8.
Research by the British Business Bank indicates the SME lending landscape has undergone dramatic changes since 2019, with the four largest banks accounting for a staggering 90% of lending. However, since 2024, challenger banks have taken the limelight, accounting for 60% of annual gross bank lending to SMEs.
Allica Bank, a rapidly expanding fintech catering to SMEs, revealed a "dramatic collapse" in SME lending equivalent to up to £65bn over the past 25 years. They have been advocating for a long-term solution to fix the SME finance market, which they believe is vital for rejuvenating UK economic growth and productivity.
Addressing the concerns raised, a spokesperson for UK Finance, the industry body for banking and the financial services sector, stated, "We held a constructive meeting with the government and discussed the range of funding and support available from banks and other lenders to help SMEs grow." They suggested making the Growth Guarantee Scheme permanent and expanding its budget to unlock even more lending.
Chancellor Rachel Reeves is planning to publish the Treasury's first Financial Services Growth and Competitiveness Strategy on July 15 as part of her efforts to boost growth in the financial services sector.
A government spokesperson acknowledged the difficulties faced by businesses, stating, "We know the crucial role of small businesses in our economy and are committed to helping them access the finance they need to scale, export, and conquer new markets."
Underlying Problems Faced by Small Businesses in Obtaining Loans
Small businesses in the UK encounter various challenges when seeking loans:
- High Credit Costs and Risk Aversion: High credit costs and risk aversion among lenders pose a significant barrier. Many small businesses find traditional credit options pricey and hard to secure, often resorting to unfavorable alternatives such as credit cards and overdrafts for working capital[2].
- Lack of Awareness and Digital Skills: Small businesses frequently lack awareness about available financing options and the digital competencies needed to navigate online applications and manage finances effectively. This hinders their capacity to explore alternative funding sources[4].
- Branch Closure and Regulatory Issues: The closure of bank branches limits access to banking services, including advice and support. Regulatory frameworks, like stringent capital requirements, discourage banks from lending to small businesses, as they favor low-risk property-backed loans[3].
- Demographic Disparities: Ethnic minority-led SMEs, particularly Black entrepreneurs, face difficulties in securing finance, highlighting disparities in the financial sector[2].
Steps the Government is Taking to Alleviate These Issues
In an attempt to help small businesses access financing, the UK government is implementing several measures:
- Growth Guarantee Scheme: The British Business Bank's Growth Guarantee Scheme offers a 70% government-backed guarantee to lenders, enabling them to extend up to £2 million in loans to smaller businesses. This scheme has been reinforced with an extra £500 million to aid businesses affected by global tariff changes[1].
- Challenger Banks: The government supports the expansion of challenger banks, which are filling the void left by traditional lenders by providing more lending to SMEs. In 2024, challenger banks accounted for 60% of SME lending[2].
- Non-Traditional Lending: While not a direct government measure, the rise of non-traditional lenders is helping bridge the SME credit gap. However, these lenders come with their own set of risks[3].
- Policy Reviews and Support: Ongoing debates and reviews are focusing on improving access to finance for SMEs, including addressing regulatory barriers and enhancing digital capabilities[3][4]. These initiatives aim to create a more favorable financial environment for small businesses in the UK, addressing both immediate credit needs and long-term challenges related to financial inclusion and business growth.
- The government, aware of the high credit costs and risk aversion that small businesses face when trying to secure loans, is stressing the importance of the Growth Guarantee Scheme, offering a 70% government-backed guarantee to lenders, thereby enabling them to extend up to £2 million in loans to smaller businesses.
- To alleviate the issue of lack of awareness and digital skills among small businesses, the government is implementing initiatives aimed at improving digital capabilities and offering support to help small businesses navigate online applications and manage finances effectively.
- In an effort to tackle the challenges posed by the closure of bank branches and regulatory issues, the government is advocating for the expansion of challenger banks, which have accounted for 60% of SME lending since 2024, and supporting the rise of non-traditional lenders as a means to bridge the SME credit gap.
