Is demand for finance holding us back?

SMEs account for three-fifths of employment in the UK, yet for a variety of reasons many struggle to access appropriate and affordable finance suitable to their life cycle stage.

Traditionally, the banking system in the UK has had the responsibility of providing credit to these businesses. But for some SMEs, getting a bank to approve a loan can be difficult, not helped by bureaucracy and in many cases a lack of readily available financial information to support an application.

Instead, day-to-day expenses are covered using costly overdrafts and credit cards.

In response to these and other market failures, it’s often the case that Government, working with agencies and alternative finance providers step in to offer targeted supports. During the pandemic, the creation of additional business supports was particularly prevalent.

A survey of Chartered Accountants earlier this year found that almost half believe financial stress is on the rise. As small businesses try to rebuild following COVID-19, is the current system of finance options enough?

Back in 2014, the UK government decided to legislate to create a mandatory process whereby SMEs that have been rejected for bank finance, estimated to be half of first-time applicants, are linked up with other lending opportunities from alternative finance providers.

At that time, a study found that the majority of SMEs only approached their main bank for finance and 40 per cent gave up their search if they were unsuccessful.

Open banking, launched in the UK in 2018, is a phenomenon that is gathering pace among consumers and lenders alike.

Its promise is a practice that aggregates data including bank transactions, sales ledgers and credit bureau information from a range of financial apps all in one place.

Customers can get a real-time view of their cash position and identify working capital gaps before they become critical. Banks and potential lenders can leverage this new data to speed up the lending process with reports of lenders saving tens of thousands of work hours a year and approving greater volumes of loans with higher confidence.

While not without its risks, open banking has the potential to reshape the consumer’s banking experience. At a time when several banks across Northern Ireland have announced their intention to close branches, the possibilities are enormous.

The branch closure announcements, which came despite a recommendation from the Financial Conduct Authority in January that banks should pause closures during the pandemic, will inevitably affect small businesses seeking working capital and other forms of finance to rebuild.

In June 2020, Companies House recorded the highest number of new company formations. For the future growth of these businesses and their ability to sustain employment in Northern Ireland, getting access to the right financial supports will be critical.

Deciphering what options a business has is yet another challenge for many SMEs.

The UK’s SME Finance Charter, a government initiative to make it easier for SMEs to access finance, has just had HSBC join its ranks. In addition to bank loans, asset-based finance has allowed many businesses raise finances against the value of their assets.

Invest NI oversees significant debt and equity funding and many new and existing local businesses have been able to grow on the back of this.

The agency will need to continue its key role in enabling businesses access to funding in the months ahead. Unfortunately, Invest NI has had to pause offers of financial assistance to companies beyond March of this year until its own budget position is clarified.

Not helped by the lack of a sitting Assembly, the impact that this is having on the business landscape in Northern Ireland shouldn’t be underestimated.

SMEs will remain the key drivers of employment and economic growth in Northern Ireland. In the current environment of high inflation and an uncertain global economy, access to finance and deciphering what options are available in the market will be of critical importance to not just the growth but also the survival of these businesses.

Zara Duffy is head of Northern Ireland at Chartered Accountants Ireland

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