Abstract
The conventional wisdom, not just in the UK but also internationally, is that the major banks are not interested in lending to small and medium-sized enterprises (SMEs). One of the main factors cited is that banks find it difficult to gauge whether SMEs have the capacity and/or willingness to repay their debts. In contrast, some studies suggest that most SMEs seeking external funding are successful in their applications. The current study sets out to investigate the truth of these seemingly contradictory claims and makes recommendations for improvements in SME access to bank finance. In conducting the study, the authors made use of their 2012 national survey on the triggers for SME success (with over 1,000 SME responses), and secondary data analysis of government reports, with new data gathering methods using two SME focus groups, five in-depth SME case studies, and analysis of the major banks’ SME lending policies as presented through their websites. Access was obtained to interview the senior lending policy makers of four major banks and one challenger bank. Research revealed that the majority of SMEs seeking routes to finance avoid banks and traditional financial institutions. The main source of finance used by SMEs to start their business is personal/family savings, with more established SMEs using retained profits. Although banks are used by SMEs, they are not the primary source of finance. From an SME perspective, not only do banks not provide the capital required, but they also seem to know very little about what businesses (particularly small businesses) need. However, the picture is more nuanced than this. Of those SMEs that seek access to external finance, banks are still the primary source. Furthermore, and contrary to popular myth, the majority of SMEs seeking finance from banks do obtain it. This situation, however, has deteriorated. Before the economic crisis of 2008, 90% of SMEs seeking bank finance successfully attained it, a figure which fell to 74% in 2011. This partly helps to explain the growth in importance of alternative sources of finance such as business angels, peer-to-peer lending and crowd funding. Drawing upon the literature reviewed, the two focus groups with SMEs, and the five bank interviews, a number of key findings were derived.