New research shows an increase in lending to SMEs
The study by the British Business Bank has revealed a renewed availability of bank credit, which has increased for four consecutive quarters in the year to October 2015; the first time this has happened since 2007-8.
Growth totalling £1.6bn in the net flow of bank loans (excluding overdrafts), was reached in these four quarters, with the stock of bank loans and overdrafts totalling an estimated £163bn at the end of November 2015.
The bank’s Small Business Finance Markets Report also found that 71% of equity funds went to companies in London and the south east, despite them only accounting for 34% of the UK business population.
The majority of lending went to medium-sized businesses, while those with less than 50 employees were still struggling to borrow.
In comparison, start-ups (defined by the study as businesses that are less than five years old) had a 50% rejection rate from banks.
The analysis by the state-owned lender also discovered a surge in private equity and peer-to-peer finance for SMEs.
Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell, said:
“This research shows what a great market there is for venture capitalists in the midlands and areas outside London.
“With investor buy-ins completed in December and January we have seen happy investments taking business to new levels locally, and the potential for more is clearly there.
“Businesses with 50 employees re-classified as medium-sized in this report, but many businesses operate at £10m plus turnover on much fewer people, depending on sector and strength of systems.
“To put it in to context, 50 employees represents £1.4m of wage costs or more, meaning a strong business will produce gross profit of £5.6m from those people, and have sales perhaps of £12.4m.
“Depending on the average order value that is a lot of activity, and is at a point beyond which most owner managers can operate without help from strong management.
“Strong management is key both to long-term business health and generating investment appetite, looking to a business model where strategic direction comes from the owners, and systems and management take care of the day to day operations for the most part.”
Jonathan Russell, partner at UK200Group member firm ReesRussell, said:
“A good news story about lending to small and medium-sized businesses? It is shame that the report also highlights that borrowings are still proving difficult for smaller (fewer than 50 employees) businesses and in particular start-ups, which now seem to be businesses under five years old, when previously it was usually two years.
“The real worry is the lack of finance available for start-ups, because ultimately this is where the businesses of tomorrow will come from and often the best innovation. It is true money is becoming slightly more accessible, but the lenders are extremely cautious with a mentality of why should we say no, rather than how can we say yes.”