Are high street banks turning their backs on SMEs?

Small businesses are turning en masse to alternative lenders for funding, as concerns mount that the UK is falling behind on SME finance.

iwoca’s latest quarterly survey of SME finance brokers shows that 71% now agree that mainstream banks are pulling back from small business lending, reflecting a perceived loss of appetite for SME finance on the high street. 

In March, a report by the British Business Bank (BBB) found that challenger banks and fintechs today account for around 60% of gross lending. 

Specialist lenders have now outperformed the UK’s “Big Five” banks of HSBC, Barclays, Lloyds, NatWest, and Santander for four years in a row.

SMEs favouring alternative lenders

iwoca’s latest pulse survey of SME finance brokers, released today, shows that 61% chose to submit the majority of their loan applications to alternative lenders in the last four weeks. 

iwoca says the shift underlines a change in business attitudes, as SMEs seek out modern, tech-enabled solutions in place of traditional banking options.

With SMEs short on time and running out of options for finance, 73% of brokers say speed of decision-making is the main driving factor behind the shift.  

Similarly, the data suggests that, where SMEs are still turning to high street banks for funds, they will do so for smaller loans, as these are more likely to be granted quickly.

For spending on significant business investment decisions, though, 65% of brokers say they now steer clients toward non-banks for funding applications worth over £100,000.

69,000 new Startup-Up Loans

Access to finance has become a hot topic in the UK startup scene, thanks to a wealth of data showing that small businesses are becoming less likely to take out loans. 

In part, this could be a reflection of reduced appetite among SMEs, particularly in today’s economy. As the UK deals with higher interest rates and tighter lending conditions, SMEs are reportedly repaying debt at levels more than 20 times higher than pre-pandemic.

But another cause could also be lenders who are unwilling to loosen their purse strings. Last month, the fintech Allica Bank reported that SME loan rejections have risen from between 5-10% three decades ago to 40% today.

The UK government unveiled its Small Business Plan at the end of July in order to address the problem to “drive growth through the country” through its Plan for Change.

Alongside reforms to late payments, the programme pledges to deliver an additional 69,000 government-backed Start Up Loans. Plus, a £3bn boost to the ENABLE programme, a BBB-led scheme that provides guarantees to funds which lend to SMEs.

What alternative finance methods are there?

Firms that are rejected from a bank loan are supposed to be recommended alternative funding methods through the BBB’s Bank Referral Scheme, first introduced in 2016. 

But, reportedly, most SMEs don’t look elsewhere if their first-choice bank declines. It’s not a surprising response to rejection. But it is potentially having a detrimental effect on business growth and profitability, particularly as high street banks dole out fewer loans.

If you’re looking for business finance this year, check out our complete guide to all the ways to fund a business without a bank loan.