It was heartening to read Conservative MP Sam Gyimah's piece in the Daily Telegraph today on the need for innovation on lending in the UK.Many of his observations echo those from our members, including:
Tough and poorly communicated changes in conditions on lending like high personal guarantees and application fees;A chronic lack of competition in the SME lending market, exacerbated by switching difficulties.
Gyimah also picks up on the discouraged demand issue, quantified perhaps for the first time in the SME Finance Monitor survey, released this week. This is the problem that SMEs aren't even bothering asking for money from the banks because they think they'll get turned down – or worse that they'll have the terms of their existing arrangements reappraised.According to the monitor, 15% of SMEs found their desire for finance ‘unrequited' by the financial sector over the past 12 months.
Clearly this is on ministers' minds too. Vince Cable mentioned discouraged demand as a concern in the House today, hinting that the Merlin commitments on bank lending could be extended or altered if they failed. Gymiah highlights an open consultation planned at the Telegraph offices on Tuesday to get ideas on what to do about lending in the UK from business people themselves. Manufacturers should definitely get along if they can.
For the record here's a few ideas of ours on what could be done:
Push the Lloyds sell-off further
There's a key opportunity for a new player to enter the bank lending market at scale through the sell-off of Lloyds branches – something the ICB has suggested should go further than the already agreed 600 branches.
Bring down barriers to SME bank switching
In the slightly longer term the government could think hard about the barriers to SME bank-switching and what could be done to improve this e.g. streamlining processes and reducing costs for renegotiating bank facilities.
Extend the Enterprise Investment Scheme to debt
Sam Gymiah mentions the EIS and the increase the government announced for it in the budget. But this is focused on small scale equity investments only. Why couldn't it be extended to included small-scale non-debt?
This is an important change given SME owner/manager's aversion to giving up a stake in businesses they have worked hard to establish. Just this afternoon I had a colleague from the Midlands advise, again, of just such a company looking to expand their factory but not willing to give up equity.
Push for more growth capital on the debt side
In a similar vein, the banks Business Growth Fund is equity-focused. This is despite its conceptual predecessor, the Growth Capital Fund, explicit targeting mezzanine as its preferred instrument precisely because of the SME-equity aversion.
Can't the government lean on the banks on this? Or do the banks call all the policy shots as well as make the lending decisions?