Data shared exclusively with City A.M. has suggested that big banks are set to withdraw even further from funding small and medium-sized enterprises (SMEs) this year, as high street lenders face criticism for prioritising larger firms.
More than three-quarters (77 per cent) of SME finance brokers believe high street banks would reduce their appetite to fund small businesses, according to a quarterly survey by online credit provider iwoca.
The figure remained unchanged from the previous quarter as brokers observed a widening funding gap for SMEs after lending spiked during the Covid-19 pandemic.
Almost nine in 10 brokers (86 per cent) thought demand for SME finance would rise over the next six months.
However, 68 per cent predicted high street banks would further reduce access to working capital for SMEs over the next twelve months, up three points from the end of last year.
Earlier this month, MPs on the influential Treasury Committee accused banks and regulators of stymying growth and innovation among small firms by making borrowing more difficult, unfairly “debanking” legitimate businesses and setting up an inadequate dispute resolution service.
Banks have pinned the sharp decline in lending on demand uncertainty, higher interest rates and the impact of loans taken out during the pandemic.
Analysis of Bank of England data by iwoca showed the share of lending going to large businesses has risen over the past decade. Last year saw 77 per cent of gross lending go to larger firms, up from 72 per cent in 2014.
The data also showed that the total value of lending to SMEs from high street banks has fallen by more than £1bn over the last year – from £15.5bn in the first quarter of 2023 to £14.2bn a year later.
As banks have pulled back, SMEs have increasingly turned to specialist lenders, which have boomed in popularity in recent years. Banking trade body UK Finance found in March that the majority (59 per cent) of SME lending now comes from outside the big banks.
Just a quarter of brokers surveyed by iwoca said they held a positive view of high street banks, while nearly half (49 per cent) were negative.
“Although optimism is quite high, the UK’s 5.5m SMEs are operating in an incredibly challenging lending market,” said Colin Goldstein, commercial growth director at iwoca.
“From SME brokers across the country to official Bank of England data, the evidence is clear that the majority of high street banks are reducing their lending to small and medium-sized companies.”
Richard Davies, chief executive of specialist Allica Bank, told City A.M. that established SMEs with between five and 250 employees “sit awkwardly between” the core markets of traditional lenders, which focus on large corporates and microbusinesses.
“Incumbent banks find the needs of these customers too costly to serve – never mind being burdened by unsuitable technology platforms and operating models to serve them effectively,” he said.
“Business banking is therefore broken, and it’s no surprise that brokers are starting to feel these larger banks retrench. It’s time for change and for business banking to go back to what it used to be, just better.”
A UK Finance spokesperson said the market for SME finance is “very competitive, with a greater diversity of providers and products than ever before”, adding that lenders are “ready and able to support businesses wanting to borrow”.
iwoca surveyed 87 brokers who had collectively submitted 2,500 applications for unsecured finance on behalf of SME clients over a four-week period in March.