Mainstream banks agree £11bn for SME overseas push

The UK’s five biggest banks have agreed an £11 billion lending package to support SMEs to invest and expand abroad, backed by guarantees from the UK Export Finance (UKEF), the government’s export credit agency.

Senior executives from NatWest, HSBC UK, Barclays, Lloyds and Santander finalised the agreement with the government at a roundtable in Westminster convened by business secretary Peter Kyle and Tim Reid, CEO of UKEF, at the end of January. 

Business Secretary Peter Kyle said: “Strengthening Britain’s export potential relies on British businesses having the means, motive, and opportunity to succeed in new overseas markets.

“The £11 billion these banks are making available will help meet the ambitions of smaller British businesses to fully export, expand and exploit these international market opportunities. It is positive proof of UK lenders’ confidence in the growth prospects of British enterprise.”

The lending will be drawn entirely from the banks’ own balance sheets and UKEF will guarantee up to 80% of eligible loans issued by each bank. Banks can apply UKEF’s guarantee automatically for working capital loans of up to £10 million.

Alongside funding, businesses will also be eligible to access advisory support through banks’ relationship managers and UKEF’s regional Export Finance Managers, to help them navigate global markets and seize new opportunities. 

UKEF Chief Executive Tim Reid said: “This partnership puts billions of pounds within reach of ambitious small businesses across the UK, reinforcing UKEF’s role as one of government’s most powerful levers for growth.

“It builds on the government’s wider commitment to backing small businesses as engines of the economy, including measures to tackle late payments, cut red tape and create the right conditions for investment.

“Together, these form a joined-up approach to removing barriers and helping smaller firms scale up. Working in partnership with business is central to the government’s growth mission.”

Widening options

The government’s initiative comes on the back of recent HSBC UK research which found that 82% of businesses that trade overseas expect to grow over the next two years, and indicates that SMEs who export are now being politically and economically prioritised. Signposting to advisory services is likely to drive SMEs to actively seek export finance, creating a potential pipeline of small businesses looking to borrow.

Edward Peck, Finance Connect CEO, said: “This is a welcome step, but it ignores non-bank lenders and challenger banks, who are also major providers of finance to SMEs. These other lenders plug the gaps which the big retail banks have little appetite to serve.

“If government guarantees are a good way to reduce risk and unlock lending, they should be applied across the whole market. Limiting them to the big banks gives one group a competitive advantage and risks reducing the rich and diverse marketplace of lenders that SMEs rely on. That would be a serious mistake.”

The 80% government guarantees allow the five banks named in the scheme to price more aggressively and on terms which non-bank lenders -the majority of which have indirect or no access to UKEF guarantees – may find hard to match, as they do not have equivalent capital relief.

UKEF-backed loans typically cover working capital, which creates gaps in demand which non-banks can fill, such as asset finance for production capacity, inventory finance, bridging facilitites ahead of bank or UKEF approval and co-funding structures.

However, the apparent continuing division between “guaranteed bank lending” and “non-guaranteed alternative lending” means mainstream banks may be incentivised to hold on to SME business which they might otherwise have passed on, reducing the referral flow to non-banks.

That could leave non-banks with the options of focusing on very early-stage and higher risk applications, or on highly complex structures which can increase their operational costs and competitiveness.

Peck said: “The UK SME finance market works because it is diverse. Big banks, challenger banks and independent lenders all play different roles, and together they deliver funding more effectively than any single group could on its own.

“Every policy designed to increase SME lending needs to support that diversity, not undermine it. Finance Connect has been making this case across the lending ecosystem, but trade bodies now need to drive that message home with policymakers: if you want better outcomes for SMEs, you have to use the whole market, not just part of it.”

To find out more about the crisis in SME lending, register for the upcoming Finance Connect webinar SME Finance: what needs to change to create better outcomes for SMEs, brokers and lenders? – sponsored by NETSOL Technologies – on Friday 13 February at 1pm. Register here.