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Peer2Peer Finance News | September 23, 2019

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SMEs unwilling to borrow despite greater access to finance

SMEs unwilling to borrow despite greater access to finance
Kathryn Gaw

ALMOST two thirds of UK small- and medium-sized enterprises (SMEs) are not willing to borrow money to fund the expansion of their business, amid “subdued” attitudes towards external financing.

According to the latest BDRC SME Finance Monitor, just 34 per cent of SMEs were using external finance in the second quarter of this year. During the same period last year, 38 per cent of SMEs said that they were using external financing.

However, although fewer SMEs are seeking funding, the approval rate for funding applications is rising. By the end of August 2018, 85 per cent of business loan applications were approved. This compares with an approval rate of 78 per cent by the end of August 2017.

Read more: SME lending slumps by £200m in July amid Brexit uncertainty

“The latest data continues to show a clear trend that demand rather than supply issues are predominately contributing to continued lower levels of lending to SMEs,” said Keith Morgan, chief executive of British Business Bank. “This confirms our own market insights, and suggests smaller businesses could benefit from being encouraged and enabled to seek out the finance best suited to their needs.”

High street banks remained the primary source of SME funding, according to the BDRC report, with 67 per cent of loan applications made to a main bank. Just 17 per cent of applications were made to another existing provider, while only seven per cent were made to a new provider. Four per cent of loan-seeking SMEs chose to use an online platform, while five per cent went “elsewhere”.

Alternative financing specialists warned that a reluctance to apply for funding could negatively affect British businesses in the long term.

Read more: SME lending growth hits two-year low while consumer borrowing rebounds

“Today’s figures show us that businesses shouldn’t shy away from what external finance could help them to achieve,” said Chirag Shah, chief executive of Nucleus Commercial Finance. “With only a third (34 per cent) of SMEs using external finance there are many who are letting opportunities pass their business by. This may be holding back their expansion, restricting head count and denting profits.”

Shah pointed out that twice as many SMEs said that they were likely to make plans based on what they can afford (79 per cent), rather than being happy to borrow to help the business grow (33 per cent). However, he added that British businesses shouldn’t be afraid of exploring external finance options. “As an industry we need to support businesses in understanding the many options available to them, to help them reach their full potential,” he said.

Read more: National investment bank needed to boost SME lending

The BDRC data suggested that SMEs are not being put off by the scarcity of financing options, with just five per cent indicating that access to finance was a major barrier. Legislation and red tape, political uncertainty and the current economic climate were instead listed as the major barriers to business growth by British SMEs.

“Overall appetite for finance amongst SMEs remains subdued, with many reluctant to borrow amid uncertainty over future trading conditions,” said Stephen Pegge, director of commercial finance at trade body UK Finance. “This underlines the importance of the government, finance industry and regulators continuing to work together to address these issues and help SMEs grow and prosper.”

Read more: SMEs becoming more aware of P2P lending