The landscape of SME lending
21/Aug/2014 • International Trade•
Earlier this month, the Competition and Markets Authority (CMA) recommended that Britain’s most recognisable high street banks be subject to a full competition inquiry, after finding that major banks do not meet the needs of small and medium size enterprises (SMEs). The CMA observed that the level of competition and variety of service among major banks was poor, to the extent that only 4% of SMEs change their banks each year.
Importantly, the CMA’s ruling could lead to a break up of several of the most prominent names on the high-street; a strategy which could potentially offer business managers greater choice. It should however provide SMEs with a range of opportunities, and so this news has been welcomed by business leaders and politicians alike.
The evolution of lending
News that the British economy is now stronger than in 2007 demonstrates the extent to which businesses have grown since the financial crisis when many SMEs struggled with access to credit. This is encouraging for business leaders eager to take advantage of new opportunities, and overcome the previous years of restricted lending hampering their growth. As it stands, the lending options of many of the UK’s major high street banks seem to present little in the way of choice for business leaders, with many unable to see any real difference between offerings.
Major banks are required to hold larger amounts of capital against SME loans, making it expensive for them to lend. The additional capital requirements, together with regulatory overhead make it seem like an unprofitable hassle for these banks to deal with small and medium businesses. That is particularly counterproductive now that signs of an improving economy are visible, and business require capital to capture growth.
FSB chairman John Allan has criticised the lack of choice available to SMEs from the UK’s largest banks, in addition to the barriers to entry for alternative financiers. CMA’s announcement may incentivise Britain’s biggest banks to improve their offerings to SMEs or risk losing business to alternative lenders.
Alternative options for SMEs
The Bank of England’s April ‘Trends in Lending’ report outlined the SME lending landscape, and identified a gap in which alternative financiers can develop. This is great news for SMEs, which stand to benefit from a new range of financing options that are overlooked by high street banks. Britain’s growth has an improved outlook and SMEs have an important role to play in this trend, while lenders have a responsibility to support them.