Is this a lending issue or a trust issue?
According to Richard Davies, the commercial banking director at TSB writing in the Daily Telegraph in January this year: SMEs are “a group that has been under-served, under-valued and over-charged for two decades – neglected by the big banks”.
He argues that SME confidence in their ability to raise finance is low such that many no longer talk to their bank and attributes this to both the after-effects of the 2008 financial crisis and the fact that the big banks have removed the personal relationship between banks and local clients, opting for an impersonal one size fits all service rather than catering to the diverse needs of local SMEs.
According to UKFinance.org, a trade association which was founded in July 2017 to represent the finance and banking industry, the value of new loans to SMEs in the final quarter of 2017 in Great Britain was approximately 11 per cent lower than in the same quarter of 2016.
The question is whether SMEs are applying for loans and then being refused or whether many are no longer applying for loans.
The 2008 financial crisis and the Brexit decision have both contributed to greater uncertainty over the future which has resulted in businesses of all sizes holding back on their investment decisions. This would suggest fewer loan applications as would a reduced confidence in any ability to repay loans.
However, there is also some evidence that SMEs are both aware of and approaching alternative sources for finance.
The rapid rise in loans by alternative lenders such as peer-to-peer lender Funding Circle would suggest they are no longer the alternative but the first choice. It will be interesting to see what happens to them if the banks turn the taps on.
Asset finance providers also have been reporting a growing recognition and awareness among SMEs about alternative sources of finance. “We have seen an increase in alternative funding solutions,” says Conor Devine, Principal at GDP Partnership.”
It is a view supported by the OECD (Organisation for Economic Co-operation and Development) which in its February report observed: “Small and medium-sized enterprises (SMEs) are increasingly turning to alternative sources of financing, while new bank lending is declining in a number of countries.”
But there is a long way to go according to Mike Cherry, national chairman of the FSB (Federation of Small Business) who recently said that only one in 10 small firms was applying for external finance.
Trust takes years to build and is easily damaged.
Whether or not the banks really are more willing to lend to SMEs is still unclear, but it seems that the relationship has changed with many not even speaking to their bank in the first instance. Instead SMEs are looking elsewhere for their funding requirements. Will the search for banking services follow?