Economic uncertainty impacting SME lending in the UK

The eagerly awaited findings from the Small Business Finance Markets 18/19 research report have been published by the British Business Bank this month and it paints a cautionary tale due to increased economic uncertainty.

Held as a barometer for the attitudes and behaviours of the UK small business community, the report revealed two broad themes: The first, identified that small businesses, due to Brexit, are either using external finance to put in place contingency plans or reducing their finance requirements as they delay longer term investment and expansion decisions. And second, overall there is declining demand for finance, although, awareness and use of alternatives to traditional finance is rising.

Some of the reports key findings include:

  • An increasing number of smaller businesses – 29%, up from 22% in 2017 – expect the UK leaving the European Union to have a negative effect on their business; a similar proportion (34%) expect it to be more difficult to access finance post-departure.
  • Gross bank lending remained stable in nominal terms, with the gross lending closely matching repayments over 2018.
  • Equity finance, asset finance and market-based lending have grown by 4%, 3% and 18% respectively.
  • Just 36% of smaller businesses now use external finance compared to 44% in 2012 and over 7 in 10 firms say they would rather forgo growth than take on external finance.
  • Awareness of alternatives to traditional finance has continued to grow, with 52% of small businesses aware of peer to peer lending, 70% aware of crowdfunding platforms and 69% aware of Venture Capital (up from 47%, 60% and 62% respectively in the previous year).

There is little surprise that Brexit has led to uncertainty within the finance markets as it has a similar effect across all industry sectors. Small businesses, with fewer resources and less flexibility of their larger counterparts, will be acutely aware of the pressure to balance risk. Contingency planning is a way of minimising their exposure.

Attitudes to lending remain somewhat negative. It is telling that 7 in 10 firms would forgo growth in order to avoid some or extra finance. The perception of market finance in the UK remains poor and the economic uncertainty certainly won’t help that figure turn around any time soon.

Does technological innovation hold the key?

For the lenders themselves, this report evidences that they must continue to make finance options easier to understand and obtain for small businesses. The continued rise (albeit slower) of alternative financing shows just how modern, flexible options, with rapid payments and clear interest structures can be appealing to those seeking finance.

It’s a highly competitive landscape and technological innovation is an area that hasn’t been fully exploited. Digitising processes and automating decisions is a logical and necessary step for organisations offering finance that are looking to keep the client cost of acquisition in the right zone. Reliance on minimal amounts of data when making decisions increases risk, manual analysis of a business’s accounts increases costs and finance providers need to ensure they tackle both issues.

Validis DataShare – fast, detailed financial history of an SME

Validis has built a solution called DataShare that helps lenders digitise their lending processes. It automates the retrieval of a small business’s historic financial data, ensuring a lender has the most up-to-date and detailed picture possible when making a decision to provide finance. For the small business, they get to experience a seamless lending journey and a quick decision allowing them to get on with running their business. Solutions like DataShare may be the difference between a small business going elsewhere for financing or choosing to not borrow at all.

Find out how Validis DataShare can help you enhance your lending processes.

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