Today’s Funding the Future event organised by the British Business Bank (BBB) focused on one of the most prominent issues facing the UK economy – access to finance for SMEs.
The BBB was founded under the recommendation of Secretary of State for Business Vince Cable in order to address the core problems of the UK’s credit market that preceded the financial crisis but only surfaced thereafter. Over the past few years there is widespread recognition that government action is required to mend an ailing financial system. One of the ways of undertaking this massive task was going forward with Dr Cable’s proposal of establishing an institution that will occupy the alternative finance space.
It was only fitting that Dr Cable would initiate the proceedings in front of a crowd that ranged from government officials and alternative finance providers to SME owners and business group representatives. Dr Cable explained the dual rationale behind the establishment of the BBB.
The first was addressing the cyclical effects of the financial crisis that placed mass restrictions on lending severing the flow of credit to businesses – and disproportionately more so to SMEs. The second was addressing the structural problems of the UK credit market that exhibits the characteristics of high-premium, high-risk finance combined with low diversity in supply.
The most prominent grievance expressed by SMEs was that the UK credit market is dominated by big banks whose very business model - driven by the quest of high premiums and with approvals contingent almost entirely on credit ratings – acts as a fundamental disincentive for SME lending. With the lack of alternative finance options (such as e.g. leasing companies, venture capital funds and web-based platforms) high growth potential SMEs fail to obtain the funds they need to expand. The result is an economy-wide misallocation of resources from productive to unproductive firms.
The mission of the BBB is to address this market failure by bridging the financing gap for SMEs and thereby alter the structure of the credit market through diversifying the supply of finance. The Bank is only at its infancy having started operations for no more than a year but has already had considerable impact. According to the BBB it has helped 35,000 businesses to access £829 million of direly needed finance.
The importance of improving access to finance for SMEs was the main message conveyed through the various panel discussions between owners of SMEs and alternative finance providers. Several executives of start-up businesses testified at how their loan applications were rejected by big banks only to access alternative finance and see their business grow exponentially. This predicament is not new to manufacturers either; manufacturing SMEs are facing similar problems in accessing credit, especially with regards to export finance.
The BBB has played an important role in facilitating this process – linking SMEs to alternative finance providers. It is now looking to expand by partnering more finance providers as well as innovating by bringing new financial products to the market. Awareness is as key as the presence of the institution; low awareness among SME’s over the finance options available to them is a primary obstacle to accessing credit. The BBB has gone some way towards changing that.
But changing the structure of the credit market for the better takes more than just boosting alternative finance. The main source of credit will continue to filter through the big banks and more competition in traditional finance is vital for a well-functioning credit market. The financial system needs to start working for businesses and not the other way round.