UK SMEs shun mainstream banks

A recent government-backed survey has found SME borrowers are dissatisfied with their banking partners, while another report suggests many are declining to access external financing altogether. The finds come as the UK Government considers a law that would compel banks which decline loan applications to refer the potential borrower to private debt funds.

Fewer UK-based SMEs are making use of external finance, according to a report published today by research group BRDC Continental, despite the sustained economic recovery. 

Only one third of UK SMEs made use of external financing in the first quarter of 2014, according to BRDC's SME Finance Monitor, while 48 percent now met the definition of a “permanent non-borrower”. 

The 33 percent using external finance represents the lowest level to date, the report said. 

BRDC said 27 percent of the SMEs surveyed reported that they regularly used trade credit, with 15 percent using both trade credit and external finance.  

The report found 6 percent of SMEs had been declined an application for bank financing.   

The report was published on the same day a new website was launched by the UK Treasury, built around a survey called Business Banking Insight. The purpose of the survey, commissioned by the Chancellor of the Exchequer George Osborne, is to rate the performance of banks which lend to SMEs in the UK. 

At present the largest four banks in the UK account for more than 80 percent of SMEs' main banking relationships. Conversations with more than 5,000 small businesses, as part of the Business Banking Insight survey, revealed a surprising level of dissatisfaction with UK lenders. 

Osborne said: “A key part of our long term economic plan is increasing competition and choice in banking, and ensuring Britain’s SMEs get the best possible service from their bank. This new survey will be a powerful tool for these businesses, providing them with the means to see who’s up for the challenge and who isn’t.”

Commenting on the launch, Liesl Smith, a spokeswoman for one of the groups which conducted the survey, the Federation of Small Businesses (FSB), told Private Debt Investor that the results showed that there was room for banks to improve on customer service and build on trust while there was a lot of scope for alternative sources of finance: “We would love to see an increase in competition and opening up to alternative sources of finance,” she said.

David Perry, associate director of ICM Research, also responsible for conducting the research, said that on talking to borrowers satisfaction ratings were typically quite low but that there was also evidence to suggest there was an emotional barrier to accessing finance: “85 percent of people we spoke to haven’t approached the bank to discuss financing,” later adding, “Maybe there are people who haven’t even thought about approaching banks for financing, but when they do they don’t score how they were treated very well.”

Speaking to Private Debt Investor, Shiona Davies, director at BDRC Continental said, that while there was some signs of difficulty for first time seekers of finance, many hadn’t applied, and part of this group genuinely wanted to fund themselves. She described 82 percent of SMEs surveyed over the last 12 months as 'happy non-seekers' of finance. “There are a lot of SMEs, as far as we can tell, that don't have an appetite for finance,” she said.

The findings come as the UK Government mulls over a recently closed consultation paper on the role of private debt in the UK corporate landscape. The paper suggests matching SMEs rejected by mainstream banking institutions for finance with alternative lenders. Reports suggest that landmark legislation forcing banks which reject SMEs for financing to refer their details to alternative lenders could be outlined next week in the Queen’s Speech.