Regulator “not good enough” at tackling SME finance worries

mctague martin FSB
Martin McTague, FSB’s National Chair

SMEs are facing a growing credit crunch, while financial regulators are failing to tackle one of the key obstacles to small business gaining access to the finance they need for growth, according to the Federation of Small Businesses (FSB). Its research shows just half (53%) of SME credit applications were successful in the final three months of 2023, significantly down from a 62% success rate in the previous three months.

As well as the success rate of small business finance applications falling by 10% in three months, for those who did secure finance, affordable lending has become harder to find, the survey found. A third (33%) of SMEs faced interest rates over 11%, while the average rate offered was around 9.3%, up from 8.9% in Q3 2023.

FSB has been flagging up concerns about SMEs difficulties in accessing external sources of finance for several years. Its 2022 report Credit Where Credit’s Due found that while 59% of SMEs overall (and 70% of small manufacturing firms) had applied for finance over the previous five years, just 37% of small firms find the application process for traditional loans easy.

Success rate plummeting

That report also identified emerging concern around the success rate of applications, noting this had halved since the peak in success rates during the pandemic in mid-2020.

As well as the impact on the growth potential of individual firms, the FSB highlighted the issues this difficulty in finding funding created for the economy as a whole, pointing to the very low proportion of small businesses planning green investments over the short term despite the need to shift businesses towards the net zero target.

The FSB research found that traditional bank loans, despite being commonly associated with small business finance, are considered the second-most difficult to acquire, ahead of only equity. The primary reason for difficulties accessing different forms of finance is due to application processes being too long and the inability to speak to anyone about the process itself.

FSB has addressed this barrier with the launch earlier this year of a new Funding Platform, provided by Capitalise, gives access to a wide range of lending options from more than 100 UK lenders.

It also offers deep insights into business credit scores and the ability for small business owners to review and amend their scores, as well as checking the credit risk of key partners such as suppliers or clients.

FCA “illogical”

However, the industry group has found itself at odds with the financial regulator in its attempts to create a more level playing field for SME finance applications by looking at the requirements lenders place on small business owners looking for bank loans.

FSB’s super complaint to the Financial Conduct Authority (FCA), the first in ten years, sought to address concerns that small business owners were being deterred from applying for loans by lenders’ demands for personal guarantees, and asked the regulator to launch a review.

In response, the FCA has said it will collect data on the number of personal guarantees in place for sole traders and small partnerships, will work with the Financial Ombudsman Service to monitor the levels of complaints about this issue, and consider whether lenders need further guidance on personal guarantees.

Crucially, however, the regulator said that limited companies fall outside of its remit, despite the fact that more than one million limited company directors in the UK run their small businesses by being incorporated.

Martin McTague, FSB’s National Chair, said: “The FCA’s response is just not good enough. Our super-complaint outlined why there is a potentially a systemic problem when it comes to personal guarantees, and the chilling effect they have on growth and investment. For the FCA to refuse to gather evidence from regulated lenders, which would illustrate the scale of the problem affecting limited companies is illogical.

“The fact that the FCA has failed to even gather any evidence on lending to limited companies, only increases the urgency for Treasury to consider an expansion of the regulatory perimeter.”

McTague emphasised that the FSB is in no way calling for personal guarantees to be banned. Instead, it wants to highlight what it calls their “excessive” use.

“Anecdotally, we hear that requesting personal guarantees is almost a blanket policy for some lenders, which cannot be right if the loan value is relatively small, and there’s no evidence that the business will struggle to repay.

“Personal guarantees sit in a twilight zone in terms of regulation, as they turn a loan to a limited company into a personal liability, yet the individual borrowers aren’t covered by consumer protections that exist for other kinds of lending,” McTague explained.

To tackle the issue, the FSB wants the FCA to gather data on the extent to which personal guarantees are being requested by regulated lenders, and whether particular groups or types of would-be borrowers are affected by the issue more than others, as well as assessing the economic damage caused as a result.

“The market is not simply going to sort this out, and our anecdotal evidence suggests there is a strong case for expanding FCA’s regulatory remit to include personal guarantees requested when lending to limited companies,” McTague declared.

Martin McTague, FSB’s National Chair, is a keynote speaker at Asset Finance Connect’s (AFC) UK summer conference on 6th June at etc venues, County Hall, London, when he will be discussing the FSB perspective on SME lending, and what lenders can do to make the SME journey better.

Edward Peck, AFC CEO, said: “FSB has a dual challenge: to demonstrate how the SME lending market is being harmed by demands for personal guarantees, and to prove that the more selective use of such guarantees would unlock greater lending.

“If the FCA is not prepared to look at the unregulated market, it may be that FSB will need to do this research. In the meantime there is an opportunity for constructive dialogue. AFC expects that members will consider the case made by Martin McTague with an open mind. We believe that it is through these types of discussions that new ideas will be sparked, and innovations may be borne which will enable lenders and the lending ecosystem to commercially serve the end customers better.”

The conference also features a dedicated stream examining current regulatory challenges. For more details, visit the event website at