How the Mayor of London could play a critical and innovative role in supporting small business success
London is the undisputed economic engine of the UK economy and the most prosperous city in the country.
Boosting London’s economy
According to smallbusiness.co.uk London is home to the largest number of small and medium sized enterprises (SMEs) in the UK. SMEs in London account for 76 per cent of the total SMEs contribution to the UK economy.
In total London SMEs contributed £149 billion in 2015 which is estimated to rise to £164 billion by 2020.
smallbusiness.co.uk also forecast that London will see the greatest increase in the number of SMEs, with the number of businesses rising from 444,880 in 2015 to more than half a million (534,035) by 2020.
Critical barriers hampering growth
But access to finance and business advice remain a critical issue for many SMEs, hampering start up and growth. The Mayor of London could play a critical and innovative role in supporting small business success. We welcome the London Assembly Economy Committee’s investigation into the Mayor’s role in promoting and supporting financial inclusion in London, which includes looking at access to finance for small businesses.
Since the 2007-2008 financial crisis, access to finance remains a major barrier to start up and grow for some businesses. In particular, micro and small businesses report higher decline rates on new/renewed loan facilities. For micro businesses the decline rate remains notably high, 31% for those with 0 employees and 35% for those with 1-9 employees.
Based on reports from our members, the largest demand they see (from businesses that banks have previously formally or informally declined) is from micro and small businesses seeking less than £150,000 for start-up or growth finance.
In 2016 responsible finance providers lent £103 million to 9,600 small businesses, creating 8,200 new businesses and creating or saving 14,900 jobs.
One of our members, Fair Finance has been operating in London since 2005, providing fair and affordable loans to people and small businesses. It has helped hundreds of small businesses since then, including the London-based Oppermann brothers who needed help to grow their leather accessory business.
Evidence from our London-based members suggests that the only alternative for small businesses, is often high cost online lenders, which can charge up to 150% for a 12 month loan. As business lending is unregulated these lenders are not required to be transparent about pricing and as a result many small businesses are taking on unsustainable debt.
Mapping the challenge
It is difficult to pinpoint levels of unmet demand in London as there is not sufficient data available on the geographic distribution of lending. Currently banks disclose their lending by post code sector, on a voluntary basis, including loans and overdrafts to SMEs. But as this geographic measurement covers entire boroughs of London, the data does not clearly tell us whether there are certain parts of London or certain types of business that are more likely to struggle to access finance. Responsible Finance has mapped bank lending data with lending by responsible finance providers, and the indices of multiple deprivation. This exercise has demonstrated that responsible finance providers tend to lend into communities that face higher levels of deprivation and receive less bank funding.
Fragmented support network
For SMEs the advice and support landscape is more fragmented since the dissolution of Business Link and the consolidation of the enterprise agency network. Online referral platforms, established as part of the Government’s effort to increase access to finance, are new and have yet to demonstrate an impact on the SME finance market. Many small businesses prefer a face to face interaction, and the platforms have not tackled the issue of advice or constructive declines.
For both the SME and consumer markets, the support network is not joined up, and businesses find it challenging to navigate and understand alternatives. Responsible finance providers often engage in partnerships with other advice and lending organisations to create holistic support.
Other parts of the UK have tackled the access to finance issue by creating dedicated regional funds to support small businesses. For example the Northern Power House Investment Fund and Midlands Growth Engine Investment Fund,
Enabling small business success in London
The Mayor for London could make a critical difference to small businesses by
- Creating a small business fund for London, delivered by responsible finance providers who are best placed to serve those businesses excluded from mainstream finance.
- Integrating advice and support, which would also help more businesses to survive and thrive.
- Building a stronger evidence base of the barriers to accessing finance for small businesses, to ensure any new fund is effectively targeted to those with most need.
Chief Executive, Responsible Finance