North-South divide in SME lending

Do you hit a brick wall when applying for funding for your SME? Geographic inequality is affecting the dynamism of the UK’s SME finance market according to a leading think tank. Cross party group Demos are urging the Government to fund a ‘dramatic shake-up’ of the banking sector.

They’ve published a report claiming that there’s a major regional imbalance in the number of SMEs between the North and South of the country, with rejection for finance highest in some of the most deprived areas. Yorkshire, Humber, the North East and North West were all found to have among the highest lending rejection rates. In contrast, entrepreneurs in the West Midlands, the South East and South West were least likely to be forced into using their own funds for their business.

So how can this be tackled? Demos are calling for a network of regional banks, backed by the British Business Bank, to provide SMEs with much-needed finance. Their Community Chest report claims that such a network would support and enhance local economic growth. This would mirror the German Sparkassen model that supports economic growth in communities through lending to local businesses.

Commenting on the report, its author and Demos’ Research Director, Duncan O’Leary, said:

“The government has taken welcome steps to increase competition in the banking market but our research indicates that we need different kinds of banks, not just more banks. In countries such as Germany, banks come in a range of shapes and sizes, with local banks working alongside multinational, commercial organisations. As Britain seeks to rebalance its economy, with higher business investment and more even growth across the country, it is a model we should learn from. The British Business Bank already seeks to improve credit conditions for Britain’s businesses: it could be the parent of a network of local banks in the UK.”

Small business groups were consulted in interviews and focus discussions for the report as well as a wide range of sector experts and stakeholders. Case studies from banking in Spain, Australia and Germany were assessed as were local banking initiatives in Cambridge, Hampshire and Salford.

Head of Businesscomparison.com, Philip Brennan, welcomes discussion about making finance more widely available to UK SMEs,

“It’s disappointing but not surprising to hear claims of North-South Divide on lending.  A lack of access to funding can mean SME leaders are discouraged from growing their business which has a knock on effect for the local economy and employment. Debate and discussion about how best to improve lending opportunities for SMEs is a positive step forward. Could a more regional targeted funding organisation give better returns the £151m put into the Start-up loan scheme?”

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Lucy Liddiard