Global Resilience and SME Growth

UK SMEs have faced titanic challenges in 2023. What is the bold reality of SMEs today? Are they missing out on lending? How and where do they borrow?

In this blog I would like to reflect on the SME (small, medium and micro business) landscape, the lending gap, borrowing behaviours and how financial institutions are presented with a unique opportunity to support smaller businesses in the UK in the current socio-economic environment.

I recently had the pleasure of speaking to Dame Teresa Graham, Chair of the SME Advisory Group at UK Finance, along with my colleague Ravi Sidhu, Subject Matter Expert in Credit, Risk and Compliance at Dun & Bradstreet. Dame Teresa is an advocate for small and medium enterprises (SMEs). She is passionate about providing advice and guidance to both SMEs and the government, and cutting through the red tape that presents this group with so many challenges.

You can watch the full video here

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During our discussion, it was apparent that financial services share a unique opportunity to play a new role and support SMEs beyond traditional lending. This could include education around ESG and how to improve their carbon footprint, or digital enablement, or democratising data for transparency into SMEs financial scores and what products are available to them.

A big part of the economy

In the UK alone there are around 5 million SMEs, making up 95% of the UK economy and 30,000 of those contribute 55% of the GDP of the total population. Yet despite their considerable output, this group is often overlooked when we consider the economic environment and the organisations that service them.

For SMEs, Dame Teresa told us “Every day ranges from excitement to extreme misery…it’s equally scary and exciting… you can make a real difference to yourself, to the economy to your community… but it’s very scary because the risks are intense.” We heard from Dame Teresa of the unprecedented worries around the cumulative burden of managing cash flow, returning to pre-pandemic and pre-Brexit operations, new geo-political risks, complying with complex rules and regulations, wage inflation and the war on talent.

Of course, all these challenges are faced by large businesses too, but the difference is that SMEs often lack the resources, capabilities, and knowledge to address these issues. To add to that backdrop, customer pressure to run an environmentally friendly company is building. It certainly is scary – a sentiment backed up by the YoY 16% rise in insolvencies.

Yet SMEs are resilient, creative, determined, and enterprising and it’s clear there is a need to support them to support the wider UK economy. It is in challenging times that innovation really comes to the fore and the industry must be ready to take advantage. Interest rates have peaked, and inflation is beginning to recede, pointing to fiscal easing in 2024, and the UK election in 2024 offers promise of change.

A Lending Gap

SME lending can be a slow process and the vast majority of banks have not yet figured out how to make it easier and more profitable. There is a funding gap and cost of lending is too high.

Data and exponential technologies are the enabler of faster, smarter decision making for targeted SME Finance in a rapidly evolving, changing SME market. Data identifies the needs of SMEs based on their size, sector and requirements to both manage risk and tailor services to them.

Borrowing Behaviours

SMEs often have a limited knowledge of the corporate banking system and financial products available to them, beyond overdrafts and loans. Many are previous non-borrowers; unaware they can tap into alternative forms of credit that may be less costly and better suited. Banks have a job to do to educate SMEs on these and which might be best for their individual circumstances, whether it be asset-based lending, confidential invoice discounting and invoice financing, working capital financing or other alternatives.

Data certainly has a role to play here – enabling financial institutions to better match the SME with solutions best suited to them based on their firmographics and level of risk. The outcome of which could be less insolvencies, and less credit risk to the bank overall.

Challenger banks are gaining traction but so are the traditional banks. Dame Teresa told us “Over the last few years the numbers of businesses banking with high street banks has declined. British Business Bank research shows that lending to SMEs by challenger and specialist banks in 2022 was 55% - the highest on record and now exceeding that of the big five banks.” While this percentage may seem small, with so many SMEs and such a well-established banking market, this is quite significant. Dame Teresa also explained, “The challenger banks aren’t able to supply all the products that an SME needs… I wonder if we’ll see a shift to SMEs having two banks.”

In part 2 of this blog, we will discuss perspectives on the need for better financial education for SMEs, question who should take the burden of moving the needle on ESG, address data sharing and explore why spending the day in the shoes of an SME might be a good idea.

Watch the full video

Listen to the podcast on Apple

Listen to the podcast on Spotify