Responsible Finance has set out seven proposals to boost the availability of finance for fundable but under-served small businesses and break down barriers to economic growth.
Our submission to the Treasury Select Committee’s Inquiry on SME Finance, which sets out the proposals, includes analysis of the scale of the finance gap, drawing on data from BEIS Longitudinal Surveys, the SME Finance Monitor and the ONS.
Many businesses with great potential can’t access the finance they need to grow; barriers are especially acute for firms led by women, black and minority ethnic entrepreneurs, with complex needs or in areas of higher deprivation.
Responsible Finance represents the UK’s Community Lenders, also known as Community Development Finance Institutions (CDFIs). These not-for-profit organisations provide finance to people and businesses who are either excluded or underserved by mainstream finance.
They have an impressive and well-evidenced track record of unlocking economic growth and generating positive social impact through finance; 99% of their business borrowers have been previously declined by banks, but 90% go on to successfully repay their loans and grow their businesses.
Our submission to the Treasury Select Committee shows four groups face particularly high barriers in accessing the business finance they need to grow: SMEs in places with higher rates of deprivation; SMEs with more complex needs but weaker relationships with banks; SMEs led by people from an ethnic minority background; SMEs led by women.
It also demonstrates how CDFIs support businesses in these groups, enabling them to make a significant economic contribution. Its proposals to boost access to finance for underserved SMEs are:
1. Encourage mainstream finance to provide more affordable investment to CDFIs to lend to more SMEs, and grants for CDFIs to grow and develop their organisations.
2. Establish a scheme dedicated to funding Community Lenders, run by the British Business Bank (BBB).
3. Allocate Dormant Assets to Community Lenders across the UK to be used to lend onto SMEs at more affordable rates and catalyse greater private investment.
4. Continue the loan guarantee scheme which has proven effective at enabling small businesses to access the loan finance they need.
5. Endow legacy grant funds from the successful Responsible Finance Regional Growth Fund (RGF) programme to CDFIs.
6. Improve the effectiveness of bank referrals to direct more declined applicants from banks to lenders such as CDFIs.
7. Support awareness raising of CDFIs among potential SME borrowers.
Theodora Hadjimichael, CEO of Responsible Finance, said:
“Many smaller businesses lack the track record, credit history or collateral required by mainstream lenders. The barriers are particularly acute for smaller businesses trying to borrow £100,000 or less, and even more so for businesses led by women, black and minority ethnic entrepreneurs, in areas of higher deprivation or with complex needs. But hundreds of thousands of these businesses are fundable and could be creating economic and social value.
“The evidence is clear: CDFI lending creates thriving businesses and banks’ future customers. They play a unique and critically important role in improving access to finance for small businesses. They can say yes when other lenders say no, and their loans repay better than banks when lending to small businesses without collateral. But their potential has not been maximised.
“Scaling up the CDFI sector would mean more fundable, creditworthy businesses that are currently declined or discouraged from applying for finance would be able to get the funding they need to invest, innovate, grow and contribute to a more productive economy.
“We ask the Treasury Select Committee to consider our proposals and the impact they will have on unlocking much needed finance to SMEs.”
What next?
- Responsible Finance submitted its proposals to the Treasury Select Committee’s Inquiry on SME Finance on 1 September 2023. Once the TSC publishes our and other proposals we will make our full submission (16pp, with data and analysis) available to download here).
- To request more information about our submission please email [email protected] and [email protected]
- In 2022, CDFIs lent £29m to 2,480 start-ups (average loan size: £11,704) and £52m to 754 established SMEs (average loan size: £69,325)
- 99% of the businesses which borrowed from CDFIs in 2022 had previously been declined by another lender
- 94% of businesses supported were based outside London and the south-east
- 50% of businesses supported were based in the UK’s 35% most disadvantaged areas
- 36% of CDFI business loans were made to women-led start-ups and businesses (just 16-21% of UK businesses overall are led by women)
- 15% of business loans were made to ethnic minority-led start-ups and businesses (only 6% of UK SMEs are ethnic minority led)
Responsible Finance represents the UK’s Community Development Finance Institutions, ‘social purpose’ lenders which serve people, businesses, social enterprises and communities excluded from mainstream finance.