Are High Street Banks Prioritising Big Business?

In a trend that could see Britain’s SMEs welcoming challenger banks with open arms, major banks appear to be pulling away from financing small businesses. According to City AM, high street lenders increasingly prioritise big firms, which could leave SMEs struggling to secure funds from traditional banks.

The Funding Gap

A quarterly survey by online credit provider Iwoca reveals that 77% of SME finance brokers believe that high street banks are reducing their lending to small businesses. This sentiment has remained unchanged from the previous quarter, highlighting a growing funding gap since the spike in borrowing during the COVID-19 pandemic.

The Iwoca survey also reveals that 86% of respondents anticipate a rise in demand for SME finance over the next six months. Despite this, 68% expect that high street banks will further limit access to working capital within the following year.

This shift has not gone unnoticed in Westminster. In May 2024, MPs on the Treasury Committee accused big banks and regulators of hampering startup growth and innovation. They pointed to practices that make borrowing more difficult for entrepreneurs, such as unfairly ‘debanking’ small businesses and providing inadequate dispute resolution.

Further Findings

Banks have defended their reduced lending by citing demand uncertainty, higher interest rates and the lingering impact of COVID loans as key factors. Bank of England data supports this claim but also suggests that the proportion of lending to larger firms has increased over the past decade.

The data also indicates a sharp decline in the total value of lending to SMEs from high street banks, falling by more than £1bn from the first quarter of 2023.

With traditional banks stepping back, SMEs are increasingly turning to alternative lenders. Trade association UK Finance found, in March 2024, that 59% of SME lending comes from somewhere other than the high street, highlighting the growing importance of these challengers.

Cautious Optimism

Brokers' sentiment towards high street banks is notably negative. Only a quarter of those surveyed by Iwoca had a favourable view of these banks, while nearly half expressed negative opinions.

Iwoca’s Colin Goldstein said: "Although optimism is quite high, the UK's 5.5 million SMEs are operating in an incredibly challenging lending market. The evidence is clear that the majority of high street banks are reducing their lending to small and medium-sized companies."

Despite these challenges, a UK Finance spokesperson maintained that the SME finance market remains ‘very competitive’ with a greater diversity of providers and products than ever. They reaffirmed that lenders are ‘ready and able’ to support businesses wanting to borrow.

Are Challenger Banks Offering SMEs an Alternative?

As high street banks allegedly pull back from SME lending, alternative lenders are stepping in to fill the void, providing essential support to Britain’s small businesses. Although high street banks come with the reassurance of brand name recognition, there are plenty of well-established and reputable challenger banks, providing an excellent alternative for SMEs.

Some of the benefits challenger banks offer include:

• Leveraging technology to offer more accessible, flexible and tailored financial solutions

• Freedom from the constraints of legacy systems

• The ability to adapt to SMEs' specific requirements

• Typically, faster approval processes

Additionally, alternative lenders typically offer a more comprehensive range of options compared to traditional banks. From invoice finance to asset-based loans, SMEs can choose solutions that best suit their unique circumstances. This variety ensures that businesses are not limited to a one-size-fits-all approach.

The flexibility of alternative lenders is evident in their willingness to consider businesses that may not meet the stricter criteria of some high street banks. While this is only sometimes the case, some SMEs, particularly startups, may struggle to provide the extensive financial history many traditional lenders require.

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