Lack of awareness amongst SMEs of alternative finance options is creating a potential economic hole of up to £20bn, according to the latest report released today by GLI Finance.
The findings are backed by key industry stakeholders including the Federation of Small Businesses, British Chambers of Commerce, National Association of Commercial Finance Brokers, Asset Backed Finance Association, Innovate Finance, and techUK.
The report co-authored by Dr Louise Beaumont, Head of Public Affairs at GLI Finance and Tania Zeigler, Researcher, Cambridge University Centre for Alternative Finance, analyses data from a range of sources and details how, with 80% of SME lending provided by four UK banks and 56% of SMEs unfamiliar with any forms of alternative finance, the Government must reduce concentration risk in the credit ecosystem through a well-resourced awareness raising campaign.
With SMEs accounting for 65% of net job creation, the report argues that failing to increase awareness of alternative sources of credit to help fuel growth could cost the economy up to £20bn by 2020 as traditional lenders continue to withdraw crucial funding lines.
Analysis by Funding Options, a GLI Finance investee platform, estimates that since 2011 banks have withdrawn £5.7m a day in small business overdrafts alone - cutting available credit by £8.4bn (from £20.9bn to £12.5bn) at an estimated cost to the economy of £2.9bn. From a regional perspective, the Chancellor George Osborne’s Northern Powerhouse is also at risk before it even gets going, as SMEs in the North are having their overdrafts slashed at twice the rate of SMEs in London – 55% of SMEs in the North have had their overdrafts cut or removed vs 25% of SMEs in London.
To address these issues, and ahead of the Autumn Statement, the report calls for the Government to support the implementation of the Small Business Enterprise and Employment Act’s mandatory referral scheme with a national awareness raising campaign utilising the principles of behavioural insight (aka ‘Nudge’) in order to change SME behaviour, drive structural change to the financial system, and facilitate economic growth.
Commenting on the report, Dr Louise Beaumont, Head of Public Affairs at GLI Finance said: “The body of evidence that supports the crucial role the alternative finance sector has played in driving SME growth is unquestionable, helping SMEs increase both turnover and profit, whilst hiring more staff. The industry has started to fill a vital credit gap as traditional lenders have retrenched from the market in the wake of the financial crisis.
“The alternative finance industry has achieved a great deal in a short space of time but it is imperative the Government now leads the charge, supported by industry groups and industry itself, in order to ensure SMEs get the help they need to grow and that the alternative finance industry cements its position as a mainstream and complementary part of the financial services sector – not least to give the Northern Powerhouse a fighting chance, given that SMEs in the North are having their overdrafts slashed at twice the rate of SMEs in London.
“Lack of awareness amongst SMEs of the financing options available to them – despite a plethora of well-intentioned documents, reports and guides for SMEs - is an issue that threatens to undermine the UK’s economic recovery, and we call upon the Government to leverage the proven track record of the behavioural insights (aka ‘Nudge’) approach to build upon the progress made by the alternative finance industry to date. We must think less about individual policies and mechanisms in isolation and much more about the bigger picture. We need to do the simple things much more effectively to enable SME behaviour change, and to create an environment where the Small Business Enterprise and Employment Act can flourish to the benefit of SMEs and to drive growth in the broader economy.”
In support of the report, Lawrence Wintermeyer, CEO, Innovate Finance said: “The Competition and Markets Authority’s interim findings confirm that SME finance remains highly concentrated, with awareness of alternative finance options among SMEs low, despite a raft of business finance guides in the market.
“More must be done to encourage SMEs to explore all of the finance options available to them, to diversify the sources and access to SME finance, and to change SME behaviours when it comes to material consideration of alternative sources of finance. The data in the Cambridge Centre for Alternative Finance report highlights the positive impact this could have on jobs and investments in SMEs.
“A new approach rooted in behavioural economics should be explored to help ‘nudge’ SME behaviour and diversify the SME finance landscape to help drive economic growth.”