Allica research pinpoints £90bn SME lending shortfall

Government plans to stimulate economic growth are at risk because of failures to address a crisis in SME lending, according to research from Allica, which has identified a £90 billion shortfall in bank lending to this market segment over the past 25 years.

The fintech says a substantial credit gap of up to £65bn has developed since the financial crisis, and is calling for a full reboot of the UK’s SME lending market.

The report highlights how small businesses invest at only a third of the level of large corporate businesses, and points out that SMEs applying for external finance has fallen markedly from 65% in the late 1980s to just 25% between 2022-24, with the UK now having some of the lowest application rates for finance from SMEs ever, and the lowest application rates recorded internationally by the OECD.

Evidence also shows that SME loan rejections have risen from between 5%-10% three decades ago to 40% today, while there has been a dramatic collapse in SME overdraft lending by banks. Overdrafts made up 30% of all SME finance in the late 1990s, but sit at just 5% today, creating a critical working capital gap in the SME economy.

Long term fix

Richard Davies, CEO of Allica Bank, who led the research, said: “Our research makes for stark reading, revealing just how much the SME finance market has deteriorated since the 1990s, with record low application rates from SMEs combined with bank lending that’s focused on low risk, well-collateralised lending that does not meet the needs of the modern UK economy.

“It’s now vital we fix the SME finance market for the long-term – not as a narrow market issue, but as a key enabler of reinvigorated UK economic growth and productivity.”

Allica Bank is calling for targeted measures, including expanding the British Business Bank’s Growth Guarantee Scheme; a review of the prudential framework for SME finance; and a cross-industry push to improve SME finance discovery to help businesses navigate an increasingly fragmented market.

AFC conference

Richard Davies, CEO of Allica Bank, has been named a keynote speaker at the Asset Finance Connect summer conference on 3rd June, which will feature a dedicated SME finance stream.

To inform the debate, AFC will release key research conducted with 15 of the UK’s leading asset finance lenders who are AFC corporate members and attended an AFC workshop at Shoosmiths London office in April.

The results will be considered in three conference sessions each focused on critical elements of the debate: how to increase lenders’ appetite to lend; pain points in the SME lending customer journey; and opportunities to increase lending to market segments which are currently underserved.

“Asset finance is one of the most effective tools in the SME lending  box. The industry needs both to communicate its current role to government, and explore how the industry can collaborate with government efforts to increase the level of profitable lending to the sector, ensuring any proposed government interventions complement rather than compete with the commercial sector.

“A key challenge for banks serving the SME market is that lending to small business is often viewed as high risk and expensive to serve.  The AFC conference will be exploring how innovation and collaboration can address this, and we will also be considering regulatory pressures and the potential for changes in the industry’s go-to-market strategy, in order to meet new and emerging needs.”

To find out more and book your place at the AFC UK Summer Conference on 3rd June at County Hall, London, visit the conference website.