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What’s the solution to de-banking for small businesses?

News that thousands of small business accounts were closed by banks points is concerning. Notably, it points to a wider trend among traditional lenders of retreating from this type of lending. With growth slowly returning, the timing couldn’t be worse. What can small firms do?

What is behind small firm de-banking?

According to figures from the Treasury Committee, more than 140,000 business accounts were closed by major banks in the last year. The committee is looking into the reasons behind the closures as part of its inquiry into whether SMEs have adequate access to financing.

Banks have provided a list of reasons for bank closures and while the likes of “financial crime concerns” are undoubtedly legitimate, the inclusion of “risk appetite” by some institution raises questions about their activity, not least as major lenders are taking an increasingly cautious approach to SME finance.

How is this trend affecting small business lending?

In a report from the British Business Bank, bank lending to small businesses is shown to have fallen by nine per cent to £59.2 billion in 2023, a decline it attributes to a mix of high borrowing costs and economic uncertainty.

At the same time, in the latest SME Expert Index from Iwoca, over 75% of brokers noted a reduced lending appetite from traditional banks, while the number of successful credit applications from SMEs has slumped according to research from the Federation of Small Businesses.

This retreat comes at critical time for small businesses. While the news of the small upturn in GDP will further nurture optimism about improving market conditions, there is a clear need for stronger, more consistent and more widespread economic growth. Small firm investment is essential to achieving such a goal and for this to happen, access to finance is vital.

Accessing finance and how alternative lenders can help

Small businesses are all too familiar with challenges relating to accessing finance, but the retreat from small firm lending by traditional banks is a hugely unwelcome addition to the list. How can they raise capital and safeguard cash flow while eyeing growth?

Alternative finance can help.

Services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in the current funding climate (with 65% more SMEs experiencing difficulty in accessing finance from high-street banks). These alternative finance facilities, which offer a more easily accessible, affordable and personalised approach to lending, are helping small businesses survive and target recovery, stability and growth.

This profile has helped cement the reputation of alternative finance in the business sector. According to the British Business Bank, it is alternative lenders that are increasing filling the small business funding gap, with asset finance alone rising by 7% to £23.5 billion in 2023. At the same time, a 2024 study shows that more and more SMEs are turning to alternative lenders to access larger-scale finance packages.

Small firm finance options for funding investment

The new de-banking figures highlight just how challenging it can be for small businesses in the current climate, with this practice indicative of a wider trend relating to small firm lending. As the research from the British Business Bank and others shows, this is why it is critical that companies are aware of all the finance options available, including the services of alternative lenders.

To find out more about A&T Business Associates services, contact Steve Bowles on 01903 602211 or steve.bowles@atbusinessassociates.co.uk.

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