Lending to SMEs drops for fifth straight quarter as MPs probe access to funding

Lending to small and medium-sized businesses (SMEs) has fallen 20 per cent in its fifth consecutive quarterly drop as major banks face scrutiny from MPs.

UK Finance said the data showed SMEs were relying on savings instead of new funding as inflationary pressures continue to bite.

Its latest Business Finance Review found gross lending to SMEs was £3.5bn in the third quarter of 2023, down 20 per cent from £4.4bn in the same period last year.

The trade body blamed “demand uncertainty, higher interest rates and the impact of lending taken out during the pandemic” for the weakness in SME lending this year.

Data has suggested traditional lenders are becoming increasingly wary of lending to small firms as they tighten their lending criteria.

In a battle to end “harsh” lending practices to small firms, the Federation of Small Businesses (FSB) issued a super complaint to the Financial Conduct Authority (FCA) in a plea for change on Monday.

The Treasury Committee is currently investigating the disadvantages small firms face when seeking funding compared to big corporations, whether commercial lending should be more tightly regulated and if the government could do more to improve SME access to finance.

A recent YFM Equity Partners survey conducted with CEBR showed some 43 per cent of London entrepreneurs are using their personal savings to fund their company, compared to a national 38 per cent.

UK Finance said on Wednesday that small businesses were unlikely to focus on longer-term investment and expansion until they saw a “clearer path to a stronger and more certain recovery”.

The review added that SMEs were increasingly drawing on cash deposits, with total deposits falling 4.5 per cent.

Deposits have particularly slowed in the accommodation and food services sector as businesses take on new overdrafts to manage cashflow challenges and eat into savings to deal with cost pressures.

UK Finance also noted a steady drop in overdraft approval numbers this year, possibly due to an easing in cost pressures.

“SMEs in all parts of the economy continue to face a challenging outlook. Cost pressures may be easing but demand looks set to remain weak in the near term,” said David Raw, managing director of commercial finance at UK Finance.

“Our data suggests that SMEs are leaning more heavily on existing resources, particularly cash deposits, rather than seeking new finance. The higher interest rates environment will also be suppressing firms’ appetite to borrow.”

He added that the government’s plans to make “full expensing” permanent could give SMEs “an added boost for future plans”.

“Lenders are ready to support businesses across the UK. Financial services can help firms navigate current challenges and deliver growth and the sector stands ready to support any SMEs concerned about their financial obligations,” Raw said.