Financing Small and Growing Firms post

Oct 14, 2013

Small and medium enterprises (SMEs) are a vital part of the UK’s economy. In March and June 2013 Policy Exchange held two events to discuss access to finance for SMEs. This document summarises the points made at the events. The picture painted was of a complex and mismatched set of needs, incentives, and policies. Observations included that:

  • There were substantial issues with the supply of finance to SMEs. These include regulatory disincentives to lend, as well as an inflexible system for assessing SME applications for finance. This often leads to SMEs having their applications for finance rejected, or being provided with unsuitable forms of finance.
  • Problems with SME financing also existed on the demand side, including a lack of demand from SMEs for the types of finance available, and a lack of knowledge about alternative funding sources.
  • The current system of assessing SME applications for finance is inflexible. A move towards relationship banking would be desirable and allow banks a much better understanding of the situation businesses are in. This would mean they could provide more appropriate finance and support than in the more rigid system of assessment which currently exists.
  • There needs to be a longer term view of the effect capital requirements have on lending, including an awareness of the fact that if capital requirements on banks are too high it can create incentives which reduce lending.
  • Alternative forms of finance, such as crowd funding, also offer some solutions to the financing needs of SMEs by providing new streams of funding for them to access. There is also potential for partnerships between traditional and new systems of finance.
  • The role of the business bank was considered to be to tackle structural and long term problems as well as consolidating existing finance schemes. It would also attempt to increase the provision of finance to viable but under-served businesses by providing them with diverse sources of finance, as well as addressing the lack of longer term ‘patient capital’.

In order to provide greater and more appropriate funding for SMEs, both the Government and the financial sector will have to acknowledge the diversity of their requirements and adopt a number of bank and non-bank strategies to help finance them. The discussion about these policies is detailed within the research note.

Author

Guy Miscampbell

Guy Miscampbell
Economics & Social Policy Research Fellow, 2012-2014 

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James Barty

James Barty
Senior Consultant to Policy Exchange, Financial Policy, 2011-2013 

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