New research from independent SME funder, Bibby Financial Services (BFS), highlights a significant threat to the UK economy as banks appear to be retreating from lending to small businesses.

Data from BFS’s latest SME Confidence Tracker report reveal that while almost half (43%) of UK SMEs say their need for external finance has increased compared to six months ago, 54% say it is harder to access finance.

Worryingly, more than two-thirds (67%) believe banks are less willing to lend to them today, increasing to 71% for SMEs with turnover between £1m and £5m. Of those using external finance sources, two-fifths (42%) say incumbent lenders have reduced funding availability between March and September.

Commenting on this, BFS chief financial officer, Theo Chatha, said: “These findings are incredibly worrying and will undoubtedly hamper the UK’s economic recovery, placing further pressure on an already besieged SME population. Data reflects a potential turn in the UK credit cycle during a cost-of-doing-business crisis not seen on this scale for decades.”

Against a backdrop of dogged inflation, sustained energy costs and high interest rates, the deterioration in access to finance is an additional barrier for SMEs who are calling for further support. Two-thirds (65%) want to see greater tax incentives, and 57% are asking the next Government to improve access to loans and grants.

Findings are supported by data from BDRC’s SME Finance Monitor which found success rates for credit applications among SMEs fell to 46% in Q2, a significant decrease on the 74% seen pre-Covid.

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Chatha further said: “Though banks today are better capitalised than they were during the Financial Crisis, economic conditions coupled with regulatory and accounting initiatives look to be driving tougher lending criteria. This will have a significant impact on SME finance, both in terms of the level of funding SMEs have access to, and the profile of businesses banks are comfortable to lend to. Unaddressed, this situation will intensify, causing a further rise in the number of insolvencies over the coming months – something the Bank of England has warned of.”

Notwithstanding the stark findings, some optimism remains among SME owners and decision makers with 63% expecting sales to grow over the coming months. Regarding the need for external finance, 38% require funding to manage day-to-day operations, and almost half (49%) say they need finance to fuel growth and expansion. 

Chatha concluded: “Though traditional lending sources for SMEs seem to be drying-up, the reality is that there are more independent options available for SMEs than ever before. Gone are the days when banks need to be the first and only port of call for businesses looking for funding to survive, thrive and grow.”