Good morning and welcome to the UK Finance commercial conference. We really appreciate the support of all of our sponsors and it’s great to see so many people here.

The commercial finance arena is dear to my heart having spent a large part of my career in various roles both as a provider and consumer of financial services to SMEs. 

We have come to the end of a long period of very low interest rates and it is unlikely we will see another period like that in the foreseeable future. This is having profound impacts on businesses. For around 15 years investing in assets that might appreciate in value was pretty much the go to option with profitability a secondary consideration. Low borrowing costs meant businesses could see valuations increase even if profitability remained unchanged or was non-existent. Top line growth and market share mattered more when it came to valuation. After the rapid rise in rates during 2023 the risk free return on deposits reached around 5%. That means that asset valuations have to compete against that hurdle rate. So, profitability is back in fashion. What is deemed an acceptable payback period is shortening and growth, with limited prospect of producing a return, is much less acceptable. This change has happened very fast and those with high leverage  will be feeling the strain.

The insolvency service summary for 2023 shows that all forms of insolvency rose to a level last seen in 2008 and close to the previous peak in 1993. The big difference between 2008 and 2023 was that there was a much higher proportion of creditors voluntary liquidations. Whereas compulsory liquidations and other forms of insolvency did grow over the last couple of years, albeit from a low base, they are at much lower levels than in 2008. What is that picture telling us? When we look at bank lending arrears we see they have ticked up but remain at relatively low levels. It is probable that non-bank creditors are feeling the rise in insolvencies much more.

Does that mean that lending to SMEs has been restricted? Well, new gross lending according to Bank of England data totalled £59.2bn in 2023, which was down on the year before but still higher than 2021. We also have a highly competitive market where the share taken by challenger and specialist lenders increased to a new record 59% in 2023.  On the face of it there is no issue with credit supply. So, what is going on?

Post financial crisis there has been a broad tightening of lending criteria with more stringent viability assessments. This has meant funds have been directed to those businesses more likely to succeed. Lending is more like an art than a science due to the number of variables and judgement involved but increasingly data is being used more effectively to assess viability. There is a strong appetite on the part of lenders to write new business and help fuel economic growth but there is a limited supply of viable propositions. That is probably why we see the argument rage about credit provision. The data proves it is high by historic standards but the anecdote often points to a funding gap. The issue of viability is at the heart of this and there is no doubt that lenders are more stringent in their credit assessments.

We saw a super complaint made by the FSB at the back end of 2023. It was in relation to the provision of personal guarantees. This is also an emotive subject but the provision of a guarantee can help a thinly capitalised limited company access funding at a competitive rate. If guarantees were to disappear then funding would probably reduce and/or prices rise to reflect the increased risk. The industry will re-examine its processes for taking guarantees but I believe they are a worthwhile part of the security mix.

SMEs face many challenges in addition to interest rates and last year I spoke to two business owners who have been running their companies for 34 and 47 years respectively. Both businesses have coped with recessions, booms, changes in demand and technology as well as major life events. One manufactures babywear in small batches and the other wholesales janitorial equipment. They are based in the West Midlands. They are experienced and resilient owners who have dealt with multiple recessions, changes in regulation and Brexit and kept going.

I asked them how they were thinking about the transition to net zero and their message was quite simple. “We don’t know what is expected of us and we don’t know how we will finance it”. “We are more focused on being around next month than dealing with this”. Actually the language was a touch more colourful but you get the gist! Both are genuinely small businesses despite their longevity. They have little, if any, spare working capital or ability to invest and while in London we debate subjects such as taxonomy and reporting we risk forgetting these real businesses that account for around half of the jobs in the UK.

That conversation got me thinking about what the finance industry could do to help. It resulted in our report, launched today, “Unlocking the SME net zero transition”. In it we are seeking to set out a pathway that offers a simple, practical and implementable way forward for SMEs, lenders and policy makers. We believe it will appeal across party lines in this election year as both major parties are looking to generate economic growth and also transition to net zero.

We worked with consultancy BVA BDRC to run focus groups and interviews with SME leaders and lenders, to understand the challenges they face.

We have ten recommendations. The first four address the lack of time, capacity and information available to SMEs and include government relaunching the UK business climate hub with improved content and greater publicity. 

The next four recommendations will help ensure the finance sector can respond to SME needs. The first of these calls on our members to produce guides to explain where SME spending on sustainable action makes financial sense, and then offer financial products to support them.

The final two recommendations are aimed at addressing the policy gap and call on Government, Devolved Administrations and local authorities to publish sector-specific regulatory timelines, grounded in a long-term green industrial strategy. So SMEs know how to plan.

We did a similar piece of work on the residential housing market in 2022 and this has had an impact on government and opposition thinking. My hope is that our SME work will have the same effect.

The really important facet of this work is to ensure we have an inclusive transition. A transition that is just that and not one where businesses are ignored, marginalised and pushed into failure. If we think about it carefully we can help the small business community along the journey to net zero and in the process drive economic growth.

The banking and finance industry is a force for good. We provide the ability for people to grow their businesses, pay their suppliers safely and generate wealth. Our product range is diverse, innovative and keenly priced. The market is highly competitive, with banks and non-banks vying for new business and providing great service. We have dealt with recessions, interest rate rises and changes in regulation before and the challenges we face now we will also meet. In doing so we will continue to finance SMEs, the backbone of the UK economy.