Half of all business finance applications to high street banks end in rejection and UK entrepreneurs are finding themselves in an increasingly perilous position.
Without access to funding, growth is stifled, innovation dries up and jobs are either put on hold or axed.
It’s for this reason the government launched a review into funding for small and medium enterprises (SMEs) earlier this year.
We frequently hear that this is a government focused on growth and that SMEs are the backbone of the economy.
It’s therefore only right that our lending sector is being put under the spotlight and any future policy changes must ensure the UK has a supportive environment where businesses can access the right finance at the right time.
The outcome of the review is expected any day and earlier this week ministers held high level talks with bank bosses to press for change, which could see banks obligated to improve access to lending.
As pressure mounts on mainstream lenders to improve access to credit, we’re seeing a rush of small businesses turning to alternative investors like Key Fund.
Many are citing challenges brought about by increases to Employers National Insurance contributions and rises in the minimum wage. Others are simply frustrated at how some high street banks’ have a “computer says no” attitude or don’t value personal relationships.
It’s brilliant that Key Fund is able to support a growing number of businesses but I’m also concerned that some entrepreneurs are turning to high risk private lenders.
Key Fund was set up a quarter of a century ago in the former industrial heartlands of South Yorkshire to provide funding for businesses and organisations in the hardest hit communities.
We’ve evolved greatly over that time and now provide non-profit funding across the north and Midlands to businesses with a social mission.
These are almost always organisations who have been turned down by traditional lenders.
We’ve seen the incredible outcomes that social impact funding delivers, whether it’s jobs created, entrepreneurial dreams realised, or communities revitalised.
It is critical that the government reflects on the success of alternative Community Development Finance Institution (CDFI) lenders like Key Fund who deliver impact upwards of £4 for every £1 invested. As a sector, we help deliver impact which far outweighs initial investment.
CDFI organisations aren’t just lending money however – by their very nature they’re tackling some of society’s biggest problems, providing support and enabling real and meaningful change.
Unlike high street banks, CDFIs traditionally focus on disadvantaged communities with a high take up from businesses run by women, and those led by ethnic minority entrepreneurs.
Social impact investors, unlike traditional investors, aren’t just looking for financial return, so this means SMEs don’t have to compromise their mission to secure funding.
The banks might perceive SMEs – particularly those delivering social impact like community bakeries or counselling businesses – as being high risk and unprofitable but despite being turned down by mainstream lenders, 9 out of 10 customers of CDFIs successfully repay loans. We see the value in their impact and don’t make lending decision based purely on a balance sheet.
It’s evident the problem here isn’t about risk, it’s about fairness and that’s why the proposed Fair Banking Act, which could level the financial playing field, is also important.
I welcome the review into SME lending and eagerly await publication of the review.
Hopefully the government will acknowledge that barriers need removing, and how the greater adoption of CDFI models will benefit both business and communities.
The current business lending climate is not fit for purpose and, for a government which is set on restoring economic stability, the review must facilitate change.
We owe it to Britain’s five million SMEs and 131,000 social enterprises who are not only helping communities but also boosting our economy to the tune of £78 billion, re-investing a staggering £1 billion in profit along the way.