Government intervention in SME lending: is it working?

SMEs are widely viewed as the engine of growth in the UK economy, but providing the fuel to allow smaller businesses to thrive and scale up has proved challenging, given their lack of financial history and perceived heightened risk levels.  The government’s response has been to boost the options available via the British Business Bank (BBB), but after a decade of such programmes, lenders have mixed views on their success.  

Those were the conclusions of a session at Finance Connect’s UK Summer Conference explored approaches to making additional funding available and examined the impact of government intervention in SME lending on both borrowers and lenders.

Additionality

Reinald de Monchy, chief banking officer at the BBB began by outlining the bank’s role as a fully government-owned development bank focused on improving access to finance for SMEs with a twin remit – firstly as an investment business primarily focused on venture capital, private equity and early-stage funding, and secondly as a banking business solely focused on debt.

“One very important point is that the aim of our activities is to create additional finance in the market,” de Monchy explained.

The BBB seeks to address three supply-side issues. The first is risk appetite, where its growth guarantee scheme (GGS) offers a 70% guarantee on lending. Here the definition of additionality is very narrow, covering only lending which would not otherwise be available to the borrower, or would not be available on the same terms.

Next is capital efficiency, where the BBB has an offering for more specialist lenders in the form of guarantee products at a lower rate than the GGS but with more risk retained by the originator, with the aim of making lending less “capital consumptive”.

The third element is non-bank funding where the main focus is on Community Development Finance Institutions (CDFIs), making finance available via its Enable programme and also providing guarantees for UK and foreign banks providing funding.

“It’s very important that we are additional, both in the narrow sense of increasing the amount of lending available to the market, and also – with our Enable programme – encouraging others,” de Monchy stated.

To assess the bank’s performance in this respect, the BBB takes samples of the GGS loan patterns and looks at the impact on borrowing; as regards the Enable scheme, the bank looks at the impact on the market as a whole and how much more lending the lender has done.

Changing requirements

Paul Edwards, managing director of Lombard and specialist businesses at NatWest and a panellist in the session, made the point that while he was “incredibly proud” of the work it and other large banks did with the BBB during the Covid period supporting customers through a very difficult time, current requirements were different.

“We’ll probably do about £2.5bn of lending this year and our perspective is there’s probably limited additionality that would come from working with the BBB because most of our customers find it relatively easy to access funding. It’s a relatively good time to be a borrower and there’s a lot of money chasing deals,” he pointed out.

Instead, Edwards highlighted two other government schemes as offering very flexible support – UK Export Finance, which supplies funding to UK exporters, many of whom are fast growing, and the National Wealth Fund which he described as “more proactive” with investment in infrastructure projects including renewable energy.

Indeed, Lombard’s focus has switched to exploring the mega trends opened up by technology developments including Open Banking and AI, such as fintech innovations which unlock the ability to see real-time information about a SME’s business performance, as Paul Edwards explains in the clip below.

In contrast, fellow panellist Kerry Howells, managing director of Tower Leasing, said Enable had been very important to the company when it first became available ten years ago, and still played an important role in allowing for a “bigger ‘yes’” when it came to decisions on deals.

“It’s never about a deal that was a ‘no’ to turn it into a ‘yes’; it’s always about how we can offer additional lending, or different pricing to a customer we ordinarily wouldn’t be able to get to under our usual credit terms, but it does now need to evolve,” Howells said.

Andy Taylor, managing director at Haydock Finance, estimated GCS had created around 10% of additionality compared to the firm’s normal business, and was often used where an existing customer had softer assets than in other deals. While he was happy with the way the lender had worked with BBB in the past in enabling funding for more riskier deals, he was also keen to see further developments.

Hurdles

Slow decision making was recognised by several panellists as an issue in the past, and de Monchy noted that since 1 April this year, the BBB had received additional funding and would be prioritising faster decision making and acting more quickly.

Taylor also highlighted the lack of transferability with regard to guarantees, which was a reason why Haydock had not been able to use the Enable programme. But he emphasised the need for greater awareness and promotion of the schemes available to SMEs, noting “does the average SME know what the GCS is and do brokers walk into an SME and think about using GCS as a product?”

Wider community

The final panellist at the conference session was Matt Woodcock, membership director at Responsible Finance, the national membership body for CDFIs. This is a significant sector in the US where there are around 1400 lenders, backed by government legislation to encourage not-for-profit funding, compared to just 50 in the UK, of whom around 15-20 are lending to SMEs.

“In terms of additionality, it is definitely a case of turning a ‘no’ into a ‘yes’. 88% of SMEs CDFIs lend to have previously been turned down by mainstream lenders.” With a focus on the financial health of the companies they lend to, the ultimate aim of a CDFI is to restore a SME to more conventional funding choices.

Up till 2025 CDFIs relied on short-  term regional growth funds and time-limited government programmes. In contrast the BBB’s specialist community Enable programme addresses the supply side and allowed to CDFIs to move towards growing and becoming self-sustaining.

While current lending to SMEs is low, at around £180 million, Woodcock reported that other commercial lenders have come on board, citing a recent £4 million capability from J P Morgan, as well as a government roadmap with the main high street banks designed to scale the sector.

He identified the next stage as widening the understanding of the role CDFIs can play, and as part of this, Woodcock said the sector is keen to work with lenders, the BBB and other partners to create “customer referral partnerships”, whereby SMEs can be directed to appropriate sources of finance

Summing up the session, chair Christian Roelofs, managing director of Finativ, said: “I think we all agree the BBB has done a very good job in getting where it needs to be to drive growth, and we’ve also identified gaps for the BBB and businesses to step in and drive further growth.”

Watch the Government intervention in business lending session in full here.