When it comes to access to finance, there are some unresolved issues in the post-financial crisis period - which measure of lending (net or gross) is more useful? Are banks lending to small business? Will demand simply pick up with the recovery? What does a normal lending environment look like now? Everyone has a view - including EEF Economists - see our views on demand, application success rates and where we go from here.
Today the Enterprise Research Council produced some in-depth research on part of the demand puzzle - companies that have a need for finance, but act as they believe they will be unsuccessful - 'discouraged borrowers'.
- Around 173,000 small businesses could be classified as discouraged borrowers
- This group is around 4% of firms
- Attacking the causes of discouragement could result in an additional 77,000 successful finance applicants.
The numbers matter here - particularly when thinking about a policy response. While there is, for example, a lot of focus (rightly) on companies with high growth potential that need equity or patient capital, these are smaller in number than those identified by the research as discouraged.
Will growth drive the discouraged back to banks?
To answer that the research points to some of the hurdles small business face in seeking new finance.
Determinants of perceived loan applications costs - impacts on perceived success probability thresholds in percentage pointsSource: SME Finance Monitor analysis
This isn't quite a complicated as it seems. Essentially, the higher the score the larger the perceived barrier to borrowing among small companies. So, T&Cs and collateral requirements are seen as a deterrent to borrowing by small companies; more so than the economic climate (or as is shown elsewhere in the research any negative media reporting on banks). Qualitative analysis also points to prior experience with finance providers impacting on appetite to borrow.
The basis for discouragement is often the refusal of a loan or overdraft application in the past. ....it is as much the way the refusal is delivered as the refusal itself.
The factors that work in the other direction are more pro-active approaches from banks and awareness that there is the option to appeal lending decisions through the Appeals process.
What can be done?
The ERC makes a number of recommendations, including.
- More consistent implementation of the Lending Code and Lending Principles
- Further awareness raising efforts of the Appeals Process and of the Lending Code/Principles
- A working group to explore how businesses can improve their credit health and knowledge of alternative finance providers
All sensible. But accountability is missing. This is where government could helpfully act to set out what a good level of awareness of these initiatives should look like and the expected impact on this group of discouraged borrowers.