Understanding the borrowing needs of SMEs
The importance of the role that SMEs play in ensuring a healthy UK economy is beyond doubt. Statistics from the Federation of Small Businesses show that small businesses account for 99.3% of all private sector businesses at the start of 2016 and 60% of all private sector employment.
Reasonable access to credit is vital to help these enterprises grow and expand to allow them to continue to make this vital contribution to the economy. However, various factors are contributing to a dearth of easily accessible and responsibly lent credit for SMEs. External factors, including Brexit, an uncertain global political climate and slowing rates of economic growth may all contribute to SMEs being unwilling to apply for credit and to lenders being unwilling to grant it. Ultimately, the financial sector as a whole should aim to ensure that SMEs have access to the right financial products and that their borrowing needs are more fully understood.
There is clearly a wider piece of work to be done across the market to offer more appropriate products to SMEs. Close Brothers 2016 report “Banking on growth: Closing the SME funding gap” showed that SMEs are routinely not using the right type of finance – relying on personal savings, overusing overdrafts and using personal credit cards to plug funding gaps. Banks and financial institutions have a vital role to play in helping small business owners understand how best to access and use financial products. The benefits of this are twofold – small businesses that access appropriate financial products are both more likely to grow and prosper and less likely to default on payments, thereby safeguarding their credit rating and being more able to access finance to facilitate future growth.
Knowledge about and access to appropriate products is only half the task, however. In order to ensure that the finance needs of SMEs are being fully and appropriately met, lenders should aim to develop their understanding and knowledge of these needs, and of the micro and macro issues at play for the specific business applying for credit. Making informed decisions in this way not only helps lenders to mitigate risk, it means that the needs of prospective customers are more fully understood, offering them the chance to expand and grow. Lenders should aim to look beneath the surface, appreciating factors such as the limits of published information, the non-financial factors affecting corporate borrowers and the viability of the business’ long-term strategy.
This holistic approach undoubtedly requires an enhanced set of skills from lenders, but the benefits are clear. Giving SMEs access to the credit they desperately needs to grow benefits them, the financial sector and the UK economy as a whole.