The changing landscape of SME lending

business funding

Despite this, access to loans and finance to grow SME businesses remains a critical issue with recent research by BDRC Continental finding the proportion of SMEs utilising external finance has fallen from 44 per cent to 37 per cent. Why this, and what is being done to address the issue?

Reasons for a lack of loan take up include SMEs assuming they will be turned down, and the current application process. Some SMEs believe loans are too expensive and it’s too much hassle to apply.

However, there is a silver lining on the horizon. The lending landscape is changing, and fast, with two new government initiatives announced this year alone, aimed at creating easier access to finance for SMEs and increasing competition, opening up new avenues of finance at more competitive rates.

Improved data sharing

In April, the government announced a new scheme to stimulate the SME lending market. From this year, nine major banks will provide their SME performance data, including details of SMEs business loans, current accounts and credit cards to designated Credit Reference Agencies, such as Equifax.

This new information supplied, coupled with credit reference data and analytical capabilities, will enable lenders to build a comprehensive view of a business and the people behind it allowing them to assess credit risk more accurately and take robust lending decisions faster, thereby improving the service to SMEs.

It’s estimated small firms could benefit from an extra £2bn in lending once the scheme is up and running. Stimulating competition in SME lending through the sharing of SME financial data is key to improving the cost and quality of services offered.

The Competition and Markets Authority (CMA), amongst others is expecting access to this new data source to affect competition within the SME lending space. Historically the four big banking groups held 85 per cent of the SME market share. Today they see increasing competition from the likes of TSB, Santander, as well as new challenger banks and other alternative lenders.

New loan pricing and eligibility tools

In August, following an investigation into banking services for SMEs, the CMA ordered the UK’s largest SME lenders (Royal Bank of Scotland, Lloyds, Barclays and HSBC) to produce new SME loan pricing and eligibility tools to be available to customers online.

This is an encouraging step as the current state of play is costing SMEs time and money. In 2015, we estimate SMEs collectively spent nine and a half years applying for loans – almost one year of this was by customers who went on to be declined.

The new tools will bypass time-consuming paperwork and make it much easier for SMEs to find out if they’re eligible for loan. By speeding up the decision making process, and providing an early indication of interest rates, SMEs will be much more likely to shop around for the best deals.

Although only targeting the largest lenders in the initial stages, we expect widespread introduction of these tools as other banks and challengers targeting SMEs will need to compete for new business.

Whilst the full impact of both initiatives may take some time to materialise, one thing is clear, the outlook for SME finance is promising. Looking ahead we expect to see an uplift in innovative and competitive products entering the market, offering easier access to those looking for additional funds.

By Nic Beishon, head of commercial at Equifax