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British Business Bank: Demand for SME finance outweighing supply

Demand for finance among small businesses is exceeding the level of supply across the UK, a new survey from the British Business Bank suggests.

The findings come from the 'Access to Finance Spotlight' survey of 511 SME intermediaries conducted earlier this year that explores access to finance in both the UK regions and nations.

Six in ten respondents (59%) said demand for finance exceeded supply, and eight in ten (79%) agreed there were gaps in the supply of finance in their region or nation (only 12% disagreed). Although demand for finance was strong overall across the UK, 79% agreed that demand varied considerably between the business sectors they worked with. There was general optimism about the supply of finance increasing over the next 12 to 18 months, but opinion was more divided when it came to forecasting debt supply.

Current landscape

  • The demand for finance was thought to be strong amongst SMEs at all development stages across the UK, largely as a result of the Covid-19 pandemic. Respondents were most likely to say that demand was strong among SMEs surviving in uncertain times (90%), while they were the least likely to say that demand was strong among SMEs consolidating success (57%).
  • Start-ups have increased in number in 2020 and demand among start-ups was thought to be high. Similarly, respondents felt demand was high among scale-ups, who would be looking to expand and grow as they move out of the pandemic. Notably, sectoral differences were seen to play a key role in the variation for demand.
  • Despite high demand, most respondents felt this was not matched by the available supply of finance. Eight in ten respondents (79%) agreed there were gaps in the supply of finance in their region or nation, especially for early stage equity, growth stage equity and debt finance. Riskaversion amongst banks was cited as a key barrier to the supply of finance.
  • Lack of awareness of the range of finance options available was a key theme in this research. Respondents felt SMEs tended to be focused on debt finance options and more traditional lenders when seeking finance, especially earlier stage and smaller SMEs who would also find it more difficult to demonstrate viability and experience to lenders. These findings are supported by the SME Finance Survey which found similar awareness problems.

Evolving financial landscape

  • Four in ten respondents (41%) said that SMEs had taken on too much debt due to the Covid-19 pandemic, and 69% thought SMEs were not well-equipped to reduce their debt burden over the next 12 to 18 months, reflecting their challenges coming out of the pandemic.
  • Respondents felt that SMEs’ demand for finance would remain high over the next 12 to 18 months, especially for debt finance, growth stage equity, early stage equity and alternative finance.
  • There was optimism about the supply of finance increasing. Respondents thought most forms of private sector SME finance would be more likely to increase than decrease over the next 12 to 18 months, especially alternative finance and growth stage equity. However, a relatively large proportion expected the supply of debt finance to decrease, which was seen to be driven primarily by the big banks.

Enhancing the ecosystem

  • Respondents’ views were mixed on the adequacy of the finance ecosystem to support SMEs at various development stages within their region or nation. The ecosystem was often described as ‘patchy’ during the qualitative interviews, particularly in the context of supporting start-ups and scale ups.
  • Lack of SME awareness of resources available was a concern among respondents. For example, over three in five (64%) respondents said that SMEs in their region or nation were not confident in their knowledge of where to obtain information on the types of finance and specific providers available.
  • Awareness of specific finance options and providers was also thought to be low, particularly when it comes to equity or alternative finance. This could perhaps be explained by the feedback on SMEs’ reluctance to seek professional advice and a perceived gap in the delivery of financial advice provided by both the public and private sector.

ESG and net zero

  • Respondents’ were split on the importance of ESG and net zero for SMEs and suggested that businesses have a limited knowledge and understanding of the meaning and implications of these.
  • Additionally, access to specific finance that SMEs needed to realise their ESG and/or net zero goals was seen as limited. Among these respondents, the most often cited reason for that was lack of awareness among SMEs of where to find the information about their finance options.
  • This was also raised during the qualitative interviews, closely linked with a more general lack of understanding of these issues as a whole. As such, awareness raising and educating SMEs about ESG and net zero was identified as a crucial step towards filling the finance gap.

You can read the full findings here.

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