Lending to small businesses hits record low with 60% impacted by late payment

The UK’s largest business group, the Federation of Small Businesses, is warning that banks “pulling up the drawbridge” to small firms will further stifle economic growth as its new SBI study showed successful finance applications plunging over the first quarter of this year.  

Fewer than one in 10 (9 per cent) small firms applied for finance in Q1 2022, the lowest proportion since SBI records began. The share that saw applications approved (43 per cent) is also at a record low.   

The number of respondents describing the availability of credit as “good” (19 per cent) has tumbled to its lowest point since 2016. A minority (44 per cent) of successful applicants were offered a borrowing rate of up to 4 per cent in Q1 – the figure is down 32 percentage points on the same period last year.    

Of the few firms that did manage to secure finance, four in 10 (42 per cent) plan to use credit to manage cash flow, considerably more than the numbers planning to use funds for equipment updates (21 per cent), expansion (19 per cent) or recruitment (4 per cent).

The majority (61 per cent) of small firms were impacted by late payment of invoices over the first quarter of this year. A quarter (26 per cent) said the propensity for late payment is growing – close to one in 10 (7 per cent) experienced late payment for the first time in Q1 of this year.  

Of those that applied for finance, the majority (61 per cent) sought traditional overdraft and/or loan products. A quarter (25 per cent) applied for asset-based finance, such as invoice finance, with smaller numbers seeking funds through peer-to-peer platforms (7 per cent) and/or crowdfunding (5 per cent).

Latest Bank of England figures showed the annual growth rate of lending to SMEs at a record low, despite small firms making net debt repayments of close to £1 billion in March alone. Lending to big corporates, by contrast, has increased significantly since the start of the year.

One in 10 (11 per cent) small firms plan to close, sell or downsize their business over the coming year, equating to more than half a million businesses.

FSB national chair Martin McTague said lenders pulling up the drawbridge for small firms will threaten an already faltering economic recovery.  

“Businesses are born every day across the UK – many need funding to get off the ground, ensuring they reach a stage where they’re profitable and creating opportunities,” he said.

“A lot of those who’ve worked tirelessly to adapt, survive and thrive over lockdowns need finance too, empowering them to take their firms to the next level, driving our economic recovery and the transition to net zero in the process.

“A big chunk of what little finance is being accessed is being used to manage cashflow challenges as our late payment crisis worsens, rather than for much-needed investment and innovation.

“The Government should accelerate delivery of our proposal to make Audit Committees directly responsible for supply chain practice to address this worrying trend.

“Culture change is what’s needed here – lenders taking an objective approach to small business finance and big corporates putting best supply chain practice at the heart of environmental, social and governance programmes.  

“The result would be win-win: strength in corporate supply chains and a thriving small business community driving economic growth from the ground up.”