The UK’s non-bank lenders and the Government are continuing to discuss access to cheap funding from the Bank of England. It is clear that without this, non-bank lenders and the diversity they bring to the SME finance market will be damaged at a time when they are needed most. We call on the Government to open this access to non-bank lenders, including creating a £100 million fund for non-profit distributing Community Development Finance Institutions (CDFIs).
After the 2008 financial crisis, banks retracted from lending to the SME market. From a peak of £657 billion gross lending to the non-financial private sector in December 2008, lending had shrunk by £151 billion to £506 billion by December 2011[1]. Compared to this we applaud banks for stepping in during this crisis to support SMEs on an unprecedented scale. However without guarantees such as the Bounce Back Loan scheme and Coronavirus Business Interruption Loan Scheme, traditional lenders will again be forced to retreat from the smaller scale small business market.
Therefore if the sustainability and vibrancy of non-bank lenders (which fund 30% of the small business market in normal times) is damaged, businesses will be unable to access finance at a time when the economy is trying to find a route to recovery. By promoting a new mechanism to allow funding to flow through large banks to non-bank lenders and into the wider economy, the government will preserve the diversity of the SME finance market and safeguard SMEs’ access to finance in the UK.
CDFIs are not profit distributing; they reinvest surpluses back into their mission of creating inclusive economic growth and supporting local economies. They have a strong presence in the Northwest, Yorkshire and the Humber and the West Midlands, but target pockets of deprivation across the UK. CDFIs lend to businesses unable to secure finance from traditional lenders. Seventeen CDFIs deliver the Coronavirus Business Interruption Loan scheme, and they are key strategic partners for the British Business Bank, delivering both the essential Start Up Loan scheme as well as the Northern Powerhouse, Midlands Engine and Cornwall and Isles of Scilly Investment Funds. Each fund addresses structural regional imbalances through their expertise and specialised nature. There are very few lenders outside of the CDFI space which would consider supporting the borrower profile that CDFIs serve, and those that do charge prohibitive rates of interest, so if a CDFI doesn’t step in then the business will likely fail.
The sector needs access to low-cost capital to enable it to continue to step-up its lending to rebuild businesses through the recovery. CDFIs have a sustainable financial track record, but the costs of accessing funds remains high, creating higher borrowing costs for SMEs. At the time of writing, CDFIs had approved over £18 million of loans through CBILS and protected over 2,000 jobs.
We continue to work with the Government and the banks to come up with a workable solution.
[1] Henry, N. & Craig, P. (2013) Mind the Finance Gap: Evidencing Demand for Community Finance