Government announces review into SME lending

The Department for Business and Trade is launching a review into SME lending, due to the increase in the price of debt in recent years.

Commenting on the Government’s publication of a call for evidence on SME access to finance, Emma Lovell, Lending Standards Board (LSB) Chief Executive, said “SMEs are the backbone of the UK economy, and it’s vital these businesses have reliable access to the finance they need to grow and thrive. But it’s important there’s a balance between the ability to access finance quickly and being able to do so safely. The LSB’s Standards of Lending Practice for business customers – the only independent lending protections for many UK SMEs – have a key role to play here and help support innovation and growth within the financial services sector while mitigating risks SMEs might otherwise face.

“The Government’s new call for evidence looks at two areas of particular importance: access to financial services for ethnic minority-led businesses and personal guarantees.

“As the call for evidence notes, ethnic minority-led businesses are among the UK’s most ambitious. But research for the LSB by RFI Global, out today, makes clear the challenges these businesses face when seeking to access financial services. For example, just 19% of UK EMBs applying for a lending product in the last 12 months had their application accepted for the full amount, compared to 58% of White British-led SMEs. To address the challenges EMBs face, this spring the LSB is launching a new Access to Financial Services for Ethnic Minority-led Businesses Code.

“Last year, the LSB strengthened provisions on personal guarantees in its business Standards to ensure lenders are clear with guarantors about what they are signing up to, and to help avoid situations where a guarantor is surprised to find out they are personally liable for lending to a business.

“Although we identified a need for some improvements, it’s worth noting that we found issues with personal guarantees among our registered firms were rare. Lenders typically only call on these as a last resort, and there are very few complaints about their use. Personal guarantees can play an important role in helping SMEs access the finance they need, quickly, and it’s important any added protections do not add undue friction to lending journeys that could leave SMEs facing worse outcomes because they can’t access crucial funding.”

Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, said “SME lending in the UK has long been constrained by a one-size-fits-all approach from large lenders, leaving many viable businesses underserved. The reality is that SME finance is far more complex than consumer lending and you need to invest in and really understand this to offer suitable lending products to these vital businesses.

“Since 2008, businesses have become accustomed to cheap debt, but the rise in base rate over the past three years that landscape is shifting. The cost of servicing borrowing has risen, and SMEs are feeling the squeeze from all sides. There is an opportunity to broaden the understanding of where businesses can turn for finance. Specialist lenders, with their broader range of products and more flexible, relationship-driven approach, should be seen as the first port of call for many businesses—not just for those that fall outside traditional lending criteria, but for any business that needs tailored financial solutions.

“SME finance isn’t just about term loans; there’s a full suite of options—asset-based finance, event-led finance, revolving credit facilities, secured and unsecured loans —that can be structured to meet the specific needs of a business, providing flexibility and long-term stability. Many SMEs are prepared to pay more for the right financial solution, knowing they’ll receive expert structuring and ongoing support from seasoned professionals who understand their challenges and ambitions – which often will optimise the cost of borrowing.

“While lenders can innovate and collaborate, the real opportunity for change lies at the macro level. It is incumbent on the government to raise awareness of specialist lenders as the first point of call for SMEs, helping to create an environment where businesses can access the right finance at the right time. Additionally, government can help by taking action to stimulate growth, reduce cost burdens on SMEs, and ensure that funding and capital regimes for specialist lenders are structured to support rather than restrict lending growth. Without intervention, the funding gap for SMEs will persist—hindering innovation, investment, and economic recovery.”