Fuelling demand for SME lending in the UK

If SMEs are truly “the engine of the UK economy”, then it seems many are currently stuck in first gear, rather than actively seeking ways to grow the business. Demand for SME finance in the UK is low when compared to international counterparts according to research by the Department for Business and Trade (DBT), which highlighted lack of awareness of the products available coupled with difficulties navigating the market as significant factors in SME’s lack of appetite for investment.

That suggests an opening for asset finance lenders willing to address an under-served market, but the DBT’s recent response to a 10-week consultation on small business access to finance found a widespread perception amongst SMEs that “debt finance is too expensive, and the application process overly complex and time-consuming”.

Particular barriers highlighted in the DBT research include:

Product awareness: Typically small businesses approach their existing bank or main supplier when they do seek finance, rather than exploring a wider range of options such as challenger banks, commercial finance brokers or online lending platforms, with the DBT noting “this limited awareness or confidence in alternative providers may restrict access to more suitable or competitive finance products.”

Moreover, if their first point of contact declines an application or offers unattractive terms, many SMEs do not pursue other routes, contributing to lower overall uptake of debt finance.

High-costs: It also singled out the views amongst SMEs that where credit is available, “interest rates and fees often seem prohibitively high.” strengthening SME’s feelings that the costs outweigh the expected benefits of investment, further suppressing demand.

Confusion: More worryingly, the report found evidence of “opaque loan application processes, lack of clarity on assessment criteria, and slow decision-making” which it said “can result in rejection without clear explanations.”

It cautioned that “This may drive businesses toward high-interest online lenders, especially when traditional banks close accounts or delay decisions.” As a result, “high-cost lenders remain a last resort for many businesses, sometimes leading to detrimental impacts.”

Relationship management: The DBT response emphasised the gap in support for SMEs is growing, with fewer taking professional advice than five years ago. While larger SMEs will have a business relationship manager at the bank, this is not afforded to smaller SMEs so they are unable to access advisory support.

Respondents to the consultation were also unhappy about some SME experiences with digital or online only lenders, and noted that in-person support has been replaced by impersonal chatbot services, leaving those with limited staff and expertise struggling to navigate complex application processes.

Broker experience: While the report found more SMEs were turning to intermediaries, it also concluded that “experiences with brokers were mixed.” Some reported difficulty identifying trustworthy, affordable brokers who could secure appropriate finance, while others suggested that “brokers prioritise larger loans and lenders that are easier to work with, driven by commission incentives, which can result in small businesses missing out on better-value options”.

Personal guarantees: While often cited by SMEs as a negative factor in sourcing finance, the research found lenders supported personal guarantees (PGs), arguing that by mitigating risk, PGs enable broader access to finance, while unsecured business loans with PGs are typically quicker to arrange than other types of secured loans and are often easier to apply for by small business owners and start-ups who lack business assets, two of the under-served communities it identified.

Edward Peck, Finance Connect CEO, said: “As the DBT’s response to the consultation on small business finance shows, there is a huge gap in the market for clearly explained, appropriately priced lending for the SME market. And it’s up to the specialist finance providers and brokers working in asset and equipment finance market (among other places) to make that happen.

“But there is a growing worry that the way in which the industry is currently organised creates poor outcomes for all – SMEs, brokers and lenders. Too often the customer journey is flawed, while government and big banks very often fail to address crucial barriers and trade associations may not be best placed to embrace the sorts of structural changes needed to provide SMEs with the finance they need.

“How does an industry which has long operated on a model which emphasises speed and volume pivot to provide high quality, cost effective advice and lending to the SME sector? That’s what Finance Connect will be looking over the coming months at as we analyse what it takes to get SMEs on the right route to commercial success.”