Small businesses and startups are struggling to borrow from banks despite a renewed availability of credit, a study by the British Business Bank (BBB) has found.
Bank loans and overdrafts handed out to businesses of all sizes totalled approximately £163bn at the end of November last year following a £1.6bn increase in the net flow of loans reached in the year to October 2015.
However, according to the study, startups are experiencing a 50 per cent rejection rate when applying for credit and small businesses are also finding it difficult to borrow.
The BBB’s latest Small Business Finance Markets Report also demonstrated a regional bias in banks’ willingness to lend, with 71 per cent of equity funds going to firms in London and the South East – despite them counting for just 34 per cent of the UK business population.
Commenting on the data, partner at law firm ReesRussell, Jonathan Russell, described the approach of banks towards lending to startups in particular worrying. “Ultimately, this is where the businesses of tomorrow will come from, and startups often have the best innovation,” he said.
“It is true money is becoming slightly more accessible, but the lenders are extremely cautious with a mentality of ‘why should we say no’ rather than ‘how can we say yes’”.
To fuel competition and increase choice, the report called on banks to speed up the diversification of the range of finance options available to small business. Despite a surge in SME private equity and peer-to-peer funding, it found that the UK’s four largest banks still account for 80 per cent of the small business loan market, with most smaller companies failing to look for alternative sources of finance.
Tax partner at Whittingham Riddell, Duncan Montgomery, said that the report reflected an opportunity for alternative financiers, particularly outside the UK capital. “This research shows what a great market there is for venture capitalists in the midlands and areas outside London,” he commented, adding that business owners needed to be more strategic about attracting investment.
“Strong management is key for generating investment appetite and long-term business health. Direction should come from owners, with systems and management taking care of day-to-day operations,” added Riddell.
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