SMEs are by far our biggest employers, and if the Government is hoping for the private sector to soak up the jobs that are being lost in the public sector, and achieve positive economic growth, it is essential that a path is formed to allow SME’s access to finance. 

The reason why the banks are not lending seems obvious: they are simply not prepared to take the risk. In fact, for most of their existence, UK banks have been accused of being very risk averse. This was certainly the case up until the 1990’s when regulation was relaxed and competition increased sharply as more and more foreign lenders entered the market. However, the scrabble for market share that followed soon led to a sharp decline in underwriting standards, giving birth to sub-prime business and the subsequent credit crisis.

Whilst separating the banks’ investment and retail operations would avoid a repeat of the recent global financial catastrophe, it does not get over the immediate problem of how to get financial help to SMEs. Neither would the imposition of lending targets achieve the desired effect: at best it would generate unenthusiastic support and at worst could lead to an increase in the banks’ bad debts; bad for the banks, small businesses and the economy. To accomplish what is required, we need to urgently consider how the risks of lending to smaller businesses, which would still be there even if the banks were broken up, could be reduced.

There is already a government backed loan scheme for small businesses, but this has never enjoyed much support from either the banks or consumers and its application is, in any case, too narrow. Instead I would like to see the creation of a new central lending operation, jointly owned and funded by the main banks, (and possibly other well established specialist lenders,) staffed by professionals with a thorough understanding of the financial needs of small business and the associated lending risks.

The new operation would be targeted with the clear and concise purpose of lending to SMEs. New loans, underwritten by the government, either wholly or in part, would be held by the new operation for an agreed delinquency clear period, perhaps 6 months, before being transferred to a participating bank’s balance sheets. Like any banking operation it would be managed by an experienced board of directors, possibly on secondment, appointed by the owners. In addition to getting funds to businesses, the main benefit of such an operation is that it would reduce the participating banks’ initial lending risk (loan defaults are much more likely to occur in the early period than later) and limits the Governments’ liability to a predetermined maximum term for each loan.

Having such an operation in place and making the funds available dose not however guarantee they will reach SMEs. Even pre credit crunch, when commercial finance was more widely available, credible applications often failed because the greater majority of smaller businesses are unable to present a convincing loan application. To avoid this problem and limit administration and distribution costs i.e. employing a marketing and sales team, the new operation could be supported by a national network of qualified intermediaries who would assist SME’s in preparing and presenting financial applications, in return for their usual fees.

I am not sufficiently naive or arrogant to believe that what I am advocating is the only or, indeed, the best solution for tackling the SME funding problems, which will certainly stop or delay any improvement in the economy or employment. I am simply trying to do my part in keeping the subject alive at a time when the urgency appears to be disappearing and ministers are reduced to telling jokes about the reputation of bankers.”