Treasury Select Committee SME Finance Call for Evidence

Availability of Finance for Small and Medium Enterprises (SMEs)

Banks and lenders have the capacity and willingness to support UK SMEs in accessing finance. 2022 saw £65 billion of gross lending (defined with respect to loans excluding overdrafts) to SMEs, the highest since comparable records began in 2012 (except 2020 owing to Covid), and credit to SMEs continues to flow at around £5 billion gross per month (Source: Bank of England). This flow of lending comes from an SME Finance market that is more diverse than ever.
This comes on the back of £72.5 billion of lending provided under the Covid lending schemes to SMEs which has created a large legacy debt that needs to be managed and which will inevitably reduce over time. The overall stock of SME lending is £188 billion (Source: Bank of England), having reduced from its Covid peak, but still around £30 billion higher than before Covid.
In many cases SMEs supported by the Covid lending schemes have also been able to build higher than average cash deposit levels which, although now reducing in size, are still at healthy levels and reduce the demand for new finance.
Against this backdrop it is perhaps no surprise that despite the high levels of new lending to SMEs and the sector’s capacity and commitment to lend to viable businesses, demand for finance from SMEs as a whole remains relatively subdued. This is in line with the longer-term norm of many SMEs being permanent non borrowers. In keeping with this longer-term pattern there is a notable difference in demand between more established SMEs and smaller/newer SMEs many of whom borrowed for the first time during Covid under the Bounce Back Loan Scheme and as highlighted above are now focussed on paying back existing debt.
Inevitably economic headwinds are also presenting affordability challenges for some SMEs looking to take on more finance. Inflation, higher energy, and other input costs and the cost of living crisis, are all squeezing profit margins. Skills and labour shortages are adding to this challenging climate.
In this context it is important to remember that banks and lenders provide more than access to finance. They provide a significant range of support schemes, including mentoring, networking, investment readiness programmes and signposting to other sources of help and information. It is important that all relevant stakeholders encourage businesses to make use of this support and information.