Barriers to small firms’ access to finance could hold back UK economic recovery

Two thirds of small firms plan to make some form of investment in their business by 2024, but under half feel they are fully aware of the different types of financing options available to them, new research has found.

FSB’s new report, Credit Where Credit’s Due, draws together findings which paint a concerning picture around access to finance for UK small businesses, and calls for action to stop the lending gears from grinding to a halt – as happened after the 2007 credit crunch – which, if history is allowed to repeat itself, would risk undermining the country’s economic recovery.

Three in five small firms have applied for finance over the past five years, although the extraordinary circumstances of the pandemic meant the proportion of businesses taking on debt – many of them for the first time – grew. Small and medium-sized enterprises are now collectively carrying around £36 billion more in debt than they were in January 2020, pre-Covid.

Access to finance is vital for the small business sector as a whole, allowing firms to invest and grow. Finance options are also vital to keep small businesses afloat in choppy waters due to the cost of doing business crisis, skyrocketing energy costs, supply and travel disruption, and the ever-present scourge of late payments.

However, only two in five small businesses say they feel it is easy to find answers to their questions on financial applications, with three in ten (29%) saying they thought that unfair clauses and provisions were included in applications.

Meanwhile, the success rates of finance applications have dropped precipitously since the Covid loans era, with under half (46%) of applications successful in Q3 2022, compared with a pre-Covid success rate of nearly two in three (64%). The smaller a business is, the less likely its request for finance is to be approved, our research found.

The interest rates offered to small business customers have also risen, with nearly a third of small firms who applied for finance in Q3 2022 offered a rate of 10% or above.

Martin McTague, FSB’s National Chair, said: “Small businesses that cannot access finance are small businesses that are cut off from opportunities to grow and expand. It’s that simple.

“As a country, we cannot afford to have a repeat of the post-credit crunch scenario, where the dreams of thousands of entrepreneurs and business owners were crushed by a withdrawal of finance options, leaving them unable to continue, and deepening the UK’s economic woes.

“Many small firms now are in a highly precarious position, carrying debts from the pandemic, with the Bank of England raising the base rate, and with funding options getting scarcer and costlier.

“Our report pulls together various strands which together add up to a worrying picture of potential devastation, if the situation is allowed to drift.

“There is, luckily, a lot that can and should be done by the Government and by other bodies to improve the funding landscape for small firms, getting productive capital into businesses with enormous potential for growth.

“Reversing the recent, disastrous decision to cut R&D tax credits would send a strong signal that the Government is listening to what small firms need, and is backing the deep wells of innovation and enthusiasm which exist among start-ups, entrepreneurs, and small businesses alike.

“The recently announced consultation on late payments – a dead hand around the throats of millions of small firms, cutting off their cash ‘oxygen’ and causing vast amounts of unnecessary and unethical stress – is a positive step, although we know what needs to be done: the audit committees of large corporates need to publish details of payment practices in their supply chains in their annual reports. What’s stopping the Government from acting now, rather than after a months-long consultation period?

“Ultimately, small firms are looking for signs that they won’t be punished for looking to invest and expand. We’ve set out a comprehensive programme which would transform small businesses’ finance options, boosting economic growth and empowering entrepreneurship – it’s now up to the Government to move from words to deeds, to get vital funds to the small businesses who will transform them into new products, new jobs, and new premises, providing fresh hopes of recovery amid the economic gloom.”

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