The current landscape for small and medium-sized enterprises (SMEs) in the UK is marked by a significant shift in funding dynamics, with big banks increasingly withdrawing their support. According to data from Iwoca, a notable 77% of SME finance brokers observed that high street banks are reducing their funding appetite for small businesses, a trend unchanged from the previous quarter. This reduction in support from traditional banks has led to a growing funding gap for SMEs.
The demand for SME finance is expected to rise, with 86% of brokers anticipating an increase over the next six months. However, 68% of brokers predict that access to working capital from high street banks will further decline in the next year, highlighting a worsening scenario for small businesses seeking funding.
The withdrawal of high street banks has been attributed to various factors, including uncertainty in demand, higher interest rates, and the lingering impact of pandemic-era loans. Analysis of Bank of England data by Iwoca indicates a shift in lending preferences, with a higher share of loans going to larger firms. Specifically, 77% of gross lending was directed to bigger businesses last year, compared to 72% in 2014. Additionally, the total value of lending to SMEs from high street banks dropped by over £1 billion, from £15.5 billion in Q1 2023 to £14.2 billion a year later.
In response to this gap, SMEs are increasingly turning to alternative lenders, which now account for 59% of SME lending, according to UK Finance. This shift is reflected in the sentiment of brokers, with only 25% holding a positive view of high street banks, while nearly half have a negative outlook.
Experts like Colin Goldstein from Iwoca and Richard Davies from Allica Bank highlight the challenging environment for SMEs and the inadequacies of traditional banks in meeting their needs. Davies particularly points out that established SMEs, with employee counts between five and 250, are underserved by incumbent banks due to cost inefficiencies and outdated operational models.
Despite these challenges, a spokesperson from UK Finance claims that the market for SME finance remains competitive with a diverse range of providers ready to support businesses. However, the sentiment among brokers and the data trends suggest a need for significant changes in how business banking is approached, particularly for SMEs caught between the focuses of large corporate and microbusiness banking.
(Source: City AM)