The EU’s European Regional Development Fund has been critical to the effective regeneration of regions across the UK. Its coherence and longevity have been key to its success. EU funding and instruments have been instrumental for CDFIs in enabling them to grow their SME lending and increase their offering of advice and support services to entrepreneurs.
Community Development Finance Institutions (CDFIs) are non-profit social enterprises which provide affordable finance to customers not supported by other lenders. They serve three markets: start-ups, small and medium sized enterprises; social enterprises and charities; and financially excluded individuals. They are currently the only entities solely focused on investing in disadvantaged communities through loans to enterprises unable to access finance from mainstream sources. They foster inclusive economic growth; they create good jobs, build businesses and revitalise communities. In 2019, CDFIs lent £171 million to 4,600 businesses and social enterprises. 94% of loans were made outside London and the South East, and businesses lent to reported an average increase in turnover of £320,000.
With over twenty years of experience and success lending in deprived communities, including delivering good value for money on government programmes such as the Regional Growth Fund, CDFIs offer the Government an ‘oven-ready’ tried-and-tested vehicle for revitalising the UKs most deprived communities. By partnering with and investing into CDFIs, the Government will catalyse a complementary reaction by the private sector; CDFIs are experienced in leveraging in capital from UK banks to match Government funding programmes and utilising the Community Investment Tax Relief.
The UK has a landscape of deep-rooted inequality built up over many decades, and is now one of the most regionally unbalanced countries in the industrialised world. Because of the regional and local differences in prosperity, we are not harnessing the economic potential that lies in the regions. If no action is taken the gap is expected to grow with 50% of future job growth going to London and the South-East[1].
Despite relatively low unemployment figures since the aftermath of the recession in Britain’s older industrial towns, when economic trends are looked at closely this drop in unemployment can largely be attributed to the rise in out-commuting jobs in other places and a local population with an excess of retirements over young entrants to the workforce[2]. It is questionable as to whether employment growth in this way is sustainable or beneficial, particularly given the negative environmental implications of increasing dependence on the UK’s road and rail networks.
Rewarding employment opportunities should be available in towns and cities up and down the UK, as a city-centric model of growth does not necessarily work for every region. One way of creating more and better jobs is to increase investment in SMEs.
Small and medium sized businesses account for 99.9% of all private sector businesses and 60% of all private sector employment[3]; they are the engines of the UK economy. The Government has a leading role to play in addressing regional disparities for businesses by ensuring more small businesses can access appropriate, affordable finance when they need it.
Regional imbalances in business finance hampers the ability of businesses to grow, recruit and innovate. In the UK, access to finance at the local level varies considerably, and the British Business Bank’s ‘Benefits of Diverse Smaller Business Finance Markets’ report showed that for seemingly identical companies, where they are based significantly impacts the type of finance and finance providers they can access. For debt financing, bank lending volumes broadly match the regional distribution of the small business population, however local level data shows considerable variation in lending[4].
Businesses often struggle to access finance from mainstream banks if they are deemed high-risk due to a lack of trading history or insufficient assets for security. The latest SME Finance Monitor found that the success rate for bank loans in the UK has continued to decline and is now at just 63%. Among those declined, a third were not able to expand as they had planned, and a similar proportion found running their business more difficult[5].
Banks are generally cautious when it comes to small business lending. SME loan applicants may be more likely to be unsuccessful in seeking mainstream finance if: it is a new business venture; they are first time borrowers; they have unique and unproven business plans; their application is presented poorly; or if they have a difficult credit history. The estimated debt funding gap is £1.4 billion[6]. Whilst this number is not high by international standards, it still means missed economic and social benefits for the UK.
CDFIs adopt a flexible approach to determining the viability of a business, and can often provide support when mainstream lenders can’t. 93% of the viable businesses CDFIs lent to in 2019 had been previously turned down by a mainstream bank.
Business investment is also a key driver of productivity, and the decline of investment as proportion of domestic output in the past three decades has had an impact on the UK’s low productivity[7]. The SME finance monitor shows that permanent non-borrowers are less likely to export than those that use external finance, and are less likely to grow, innovate, and make a profit[8]. This contributes to the productivity challenge as businesses are unable to invest in the new equipment and technology which drives up their performance. This ultimately has an impact on the strength and resilience of local economies and the economic opportunities for their residents. Improving productivity is vital for increasing economic growth and raising living standards.
CDFIs are committed to investing in the regions of the UK and are key to the Government’s strategy to increase productivity and level-up communities post-Brexit.
You can read the full report here.
[1] UK 2070 Commission (2019) An inquiry into Regional Inequalities, available: https://drive.google.com/file/d/1DaPlONpLXwxS1lE2kLu3aQVkOQEmFLwB/view?usp=sharing
[2] Beatty, C., Fothergill, S. (2020) Recovery or stagnation?: Britain’s older industrial towns since the recession: https://www.tandfonline.com/doi/full/10.1080/00343404.2019.1699651
[3] The Federation of Small Businesses (2018) UK Small Business Statistics, https://www.fsb.org.uk/media-centre/small-business-statistics
[4] British Business Bank (2019) Small business finance report 2018/19, https://www.british-business-bank.co.uk/wp-content/uploads/2019/02/British_Business_Bank_Small-Business-Finance-Report-2019_v3.pdf
[5] http://www.bva-bdrc.com/wp-content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_Q2_2019_Management_Summary.pdf
[6] Richard Roberts, Aston University (2020)
[7] Civitas (2018) http://www.civitas.org.uk/content/files/closingthefinancegap.pdf
[8] BDRC SME Finance Monitor, Q3 2015, http://bdrc-continental.com/wp-content/uploads/2015/11/SME-charts-Q3-2015-FINAL.pdf