Posted on 14/05/2013

Research for Government finds ‘damaging shortage’ of credit for SMEs

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SMEs are finding it harder to access money than businesses that had the same credit rating prior to the financial crisis. A report for the Government has found that declining lending figures are not solely down to a lack of appetite for credit.

The National Institute for Economic and Social Research (NIESR) found evidence that tight credit supply conditions have continued even after the height of the economic crisis.

The report said, “The tightening in credit since 2008-09 has disproportionately affected low and average risk SMEs. However there was no significant change over this period in the likelihood of rejections for SMEs rated above average risk.

“This suggests banks viewed lending to safer categories of SMEs as relatively more risky in the period after the financial crisis than they did before.”

The report acknowledges that there has been a decline in SMEs desire for credit but added this is partly due to a ‘high level of discouragement from application’.  In addition SMEs face high costs of borrowing, as cuts in the Bank of England base rate were not fully transferred to SME borrowers.

The Business Bank, which launched this week [link], aims to address the issue of SME finance. It is designed to boost alternative providers and ‘challenger banks’ with cheap finance in order to increase competition in the lending market

NIESR concluded, “If the situation is not resolved, output, investment and employment will be lower than would otherwise be the case, with adverse effects on economic performance in the long term as well as the short term.”

Businesses that are seeking finance should consider how well they are presented to lenders. Approaching with a strong credit rating and trading track record can increase the chances of success despite banks remaining reserved. Looking over the business’ credit report and following Graydon’s steps are ways to boost the chances of receiving the funds needed.

Businesses within certain sectors are more likely to be turned away from banks. NIESR’s report said, “Some sectoral effects were also found with SMEs in the construction sector being more likely to be refused a loan and SMEs in the hotel and restaurant sectors more likely to be rejected for an overdraft than other SMEs.”

As a result it’s even more important for businesses operating in these sectors to effectively manage their cash flow in order to improve their chances. Exploring other options, such as asset based lending or crowdfunding, could provide an alternative source of finance for struggling SMEs.