Although the mainstream lending market has undoubtedly improved for small and medium- sized enterprises (SMEs) since the financial crisis and subsequent recession, many SMEs applying for finance are still being rejected. The British Business Bank reported last year that almost 100,000 SMEs and approximately £4 billion worth of applications for debt are rejected annually. There is clearly a funding gap – the difference between the funding required by SMEs and the funding available.
Finding an exact value for this gap is very problematic because it is difficult to measure some of its aspects, including “discouraged demand” for finance amongst SMEs, though the British Bankers’ Association reports that it has been estimated to over £30 billion.
Many of those SMEs which cannot access the finance they need are viable, but they fall through the cracks in the finance market, and whilst peer-to-peer business lending has grown significantly, it does not reach many SMEs who are still perceived as high risk or who need the kind of personal assistance a Responsible Finance Provider (RFP) such as SWIG Finance can offer.
RFP enterprise lenders, of which there are 34 nationally, lend to SMEs which struggle to access mainstream finance. As social enterprises, profits generated from lending activity are recycled back into the market in the form of further loans or financial options, while also covering the cost of their activity. The businesses supported by Responsible Finance providers are deemed to be viable, however for one reason or another cannot gain external finance.
The sector is growing; between 2012 and 2014, business lending in the RFP sector grew by 55% and in 2015 collectively lent £64 million to 10,280 microenterprises and £34 million to 1, 160 SMEs throughout the UK.
The latest figures clearly show that RFPs are successfully reaching market segments which are underserved by mainstream lenders, in particular smaller SMEs and young businesses and those with a riskier credit profile.
Undoubtedly, RFPs are creating value that would otherwise not have been created through offering capital and advice to businesses. In the financial year 2014 to 2015, they helped to create 9,584 businesses and safeguard 1,225. They also helped to create 14,433 new jobs and safeguard 5,431. During the same period, RFP’s business lending activity reportedly added £595 million to the UK economy.
Source: CIVITAS, Helping SMEs Access Finance: The importance of responsible finance providers, January 2017