Government urged to “fix business funding chasm to level-up now”
Reducing the barriers to finance for over 200,000 viable small businesses, especially those led by Black and Minority Ethnic entrepreneurs, women, and people outside London and the south-east would make “levelling-up” an immediate reality, according to a new proposal to Government following a Parliamentary inquiry.
A September report by the All-Party Parliamentary Group (APPG) on Fair Business Banking described a critical shortage of finance for small businesses, and a lack of trust between businesses and banks. Extensive research shows many small businesses falling through finance gaps, with around 230,000 viable and well-established businesses unable to get the finance they need to grow every year.
The acute lack of finance, especially for entrepreneurs needing bank loans of £100,000 or less, restricts business growth and is a particular barrier to the government’s ambition to “level up” and address regional inequalities.
The APPG’s cross-party members urged Government to further capitalise CDFIs (community development finance institutions) which have already supported tens of thousands of businesses to grow, but could do more. CDFIs are locally based, not-for-profit lenders which focus on small businesses and social enterprises turned down or excluded by mainstream lenders.
Ministers and Government officials encouraged Responsible Finance, which represents the UK’s CDFIs, to submit a proposal to Treasury for the Autumn Budget and Spending Review.
Business Secretary Kwasi Kwarteng said “the Government values the role of CDFIs in creating a diverse landscape of finance suppliers. They will be important as economic activity ramps up again in supporting businesses, particularly as they often have the local expertise to support SMEs.”
And Small Business Minister Paul Scully said CDFIs “have a vital role to play” and a diverse finance market is “particularly important if we are to provide support for entrepreneurs from groups furthest from commercial finance.”
Responsible Finance described its proposal as a blueprint to make the Government’s levelling-up goal a reality and a “tested and cost-effective method of increasing the supply of finance to the most financially excluded group of SMEs. The impact will be to increase economic output and reduce inequality.”
CDFIs already lend around £200m every year to creditworthy businesses and social enterprises which are excluded or under-served by mainstream lenders. They lend where traditional and challenger banks, and fintechs, cannot, and lend disproportionately more to under-served groups, such as BAME-led and women-led businesses and in areas of higher deprivation. Despite having been declined by traditional lenders, 9 out of 10 of CDFI customers successfully repay their loans. CDFI customers benefit from much lower interest rates than other sources of finance.
With more capital to lend CDFIs could unlock the growth ambitions of 33,000 small businesses and deliver over 65,000 new jobs, according to Responsible Finance.
“Many entrepreneurs are desperate to expand or develop their businesses,” said Theodora Hadjimichael, Chief Executive of Responsible Finance, “and affordable finance is crucial to seize opportunities and achieve their potential.
“But many lack the track record, credit history or collateral required by other lenders, or operate in a sector perceived as too risky. The barriers are particularly acute for smaller businesses trying to borrow £100,000 or less, and businesses led by Black and Minority Ethnic entrepreneurs, and women, and by people outside London and the south-east.
“Our Spending Review proposal would deliver £8 of economic benefit for every pound spent and is an unparalleled opportunity for the UK Government to make levelling up a reality by smashing barriers stifling small businesses.
“Committing £50m per year in new, first-loss capital to CDFIs for five years will lever millions of private investment on top and enable CDFIs to lend over £1.2 bn more to small enterprises with fantastic business plans, creating a bigger pool of growth companies.
“CDFIs have smashed previous Government targets for lending and job creation across the regions. With CDFIs’ help, the UK can make levelling-up a reality for businesses and communities.”
What next?
- Journalists and media: numerous case studies of thriving businesses supported by responsible finance providers (CDFIs) are available. For case studies or comment requests contact Jamie Veitch.
- Businesses seeking finance: visit www.findingfinance.org.uk