CDFIs want to work with the Government to enable this.
The Chancellor of the Exchequer has vowed to lead the most pro-growth Treasury in our country’s history. She has rightly recognised that this means working with business and making sure families have more money in their pockets. We urge her to back Community Development Finance Institutions (CDFIs) in this year’s Autumn Budget to deliver real investment into communities.
Small businesses are fundamental to the UK’s economic growth. They are a major source of employment and account for 60% of the UK’s workforce[1]. They play a crucial role in innovation. They are often deeply embedded in local communities. And many export goods and services.
Giving SMEs the tools to invest in expansion and innovation multiplies these positive impacts. However, our analysis shows that at least 50,000 businesses each year with strong, viable business plans are unable to access the finance they need. CDFIs are critical in filling these gaps. 99% of the businesses they lend to have already been rejected by a bank, and yet 90% go on to repay their loans and grow their businesses. A boost to the UK’s small businesses would be felt in communities. It is a bottom-up approach, where people will see more new businesses emerging on their high streets, more good local job opportunities, and more money being spent in their communities.
Simultaneously, business growth is stifled when households don’t have the money to spend. UK household disposable income has dropped below pre-pandemic levels. Rising prices and higher interest rates are taking their toll, which has a knock-on-effect on the whole economy. One quarter of UK adults have less than £100 in savings[2], leaving them vulnerable to high-cost and illegal lenders if they face an unexpected expense.
CDFIs directly combat financial exclusion. They put money back in people’s pockets by reducing use of high-cost lenders and loan sharks. They enable stable, long-term financial health for low-income households by giving them the ability to pay for unexpected expenses, like a car repair, without spiralling into financial difficulty. CDFIs help individuals boost their incomes through claiming the benefits they don’t know they are entitled to, which increases their stability.
CDFI lending to small businesses and individuals unlocks the economic growth and creates wealth that will be critical in rebuilding a better Britain by:
- Stimulating local job creation: By supporting SMEs, CDFIs help to generate job creation which reduces unemployment and creates economic opportunity in local communities. In 2023 CDFIs helped to create 6,411 new jobs.
- Supporting entrepreneurial success: Through mentorship and support CDFIs enable SMEs to develop more sustainable business models and strategies to scale, increasing the likelihood of growth. 2023 CDFIs provided 9,500 hours of support.
- Breaking down barriers: By focusing on underserved and under-represented groups, such as women, ethnic minorities and those on low incomes, CDFIs bridge racial, gender and geographic wealth gaps. This fosters broader and fuller participation in the economy. 30% of CDFIs loans are made to women, and 17% to ethnic minority-led businesses[3].
- They reduce regional inequality by focusing on businesses and households in more deprived areas, channelling funding where other lenders won’t. 98% of CDFI business loans are made outside London, and 75% are in a disadvantaged area according to the indices of multiple deprivation.
- Leveraging private investment: CDFIs demonstrate the viability of investing in underserved businesses, so attract in further investment from private finance, multiplying the economic growth potential. Current CDFI funding programmes match £1 of public sector investment with £4 of private sector investment.
- Keep money in people’s pockets: CDFI loans save an average of £340 per loan compared to a high-cost lender (CDFI customers saved £29m in total last year) and the wrap-around support from CDFIs identified an average of £4,200 in unclaimed benefits for over 660k people last year (totalling £600m). This helps people build up their wealth.
- Stimulate local economies: By keeping this money in people’s pockets, they are able to spend it more productively in the local economy rather than pay it in interest to high-cost lenders.
CDFIs lent £287 million in 2023; a 14% increase compared to 2022. But there is scope to significantly scale their impact.
Our Autumn Budget proposals remove impediments to economic growth by increasing access to finance for investment and supporting financial inclusion. And they do so at no immediate cost. We recommend that the Government:
- Launches an innovative investment programme for CDFIs through the British Business Bank.
- Removes the credit broking barrier to unlock referrals to community finance providers.
- Amends Community Investment Tax Relief to facilitate its future use.
- Makes a minimum 5-year commitment to the Growth Guarantee Scheme.
For more information about our recommendations you can contact Eleanor Russell, Responsible Finance’s Policy and Research Manager, at [email protected].
[1] Federation of Small Businesses: UK Small Business Statistics.
[2] Money and Pensions Service (2022) One in six UK adults have no savings.
[3] Despite women-led businesses only making up around 16% – 21% of SMEs, and ethnic minority entrepreneurs only making up around 6% of SMEs[3].