By Matt Smith CBE, Chief Executive Officer at Key Fund
The UK’s 5.5 million small businesses are the backbone of the British economy but many struggle to access the finance they need to grow.
For businesses looking to invest, expand or simply manage cash flow, it’s getting increasingly difficult to access finance and frankly, that’s holding the whole country back.
Lots of SMEs are unable to get support from the mainstream financial providers and, for those businesses with a social mission, it’s even more of a challenge because of perceived risk, complex revenue streams and non-traditional business models.
The government recognises challenges to the funding landscape and, in March, announced a unique, new consultation which could shape future policy.
Businesses are being invited to share views about barriers to finance as part of the review which will cover all aspects of the lending market and alternatives.
It’s an encouraging move and hopefully will lead to increased awareness of specialist non-profit lenders as the first step for ambitious SMEs.
It’s critical the UK has a supportive environment where businesses can access the right finance at the right time.
Just over 25 years ago, Key Fund was set up in the former industrial heartlands of South Yorkshire to provide funding for businesses and organisations in the hardest hit communities.
A quarter of a century on, we now provide non-profit funding across the north and Midlands to businesses with a social mission and have invested over £80m in this period.
What’s important to know – and at the core of all similar funding and support organisations –is that alternative lenders help deliver impact which far outweighs initial investment. It unlocks further funding and social value and that’s a double win for both businesses and communities.
Unlike traditional investors like banks, social impact investors aren’t just looking for financial return, so this means SMEs don’t have to compromise their mission to secure funding.
Social impact investors support and encourage social outcomes and help businesses access further networks and expertise.
This could be in the form of mentorship, or help with measuring and reporting impact, which helps businesses to tell their story better.
One enterprise we’re proud to have supported is Farm Urban, a vertical hydroponic farming business which hit a stumbling block when public sector contracts were heavily delayed.
Farm Urban’s founders turned to an alternative funding provider, weathered the storm and now have a strong project pipeline producing locally grown food, reducing carbon and engaging communities.
One of the main things we encounter when speaking with SMEs and social enterprises is their frustration with traditional finance models.
Entrepreneurs are often told they don’t fit the typical start-up model or that their lower profit margins are a red flag.
Many small businesses and ventures with a social mission don’t own premises and have fewer physical assets and this also counts against them.
Against this backdrop, and with the knowledge that across the board only 50% of applications for bank finance are successful, it’s not surprising that borrowing applications are plummeting.
The take-up of business loans remains subdued, and the UK has the lowest level of borrowing by non-financial businesses as a percentage of GDP, compared to other G7 countries.
The government’s call for evidence to inform policy and shake up access to finance for SMEs is welcome news.
As a country, we need to think smarter. We’re one of the few advanced economies without a developed cooperative or regional mutual banking sector.
There is so much untapped opportunity to support local economic growth. Community Development Finance Institutions (CDFIs), like Key Fund, play a huge role particularly in supporting under-served groups like women, ethnic minority entrepreneurs and businesses based in areas of higher deprivation.
In the past two decades, CDFIs have lent more than £3.3 billion to nearly 850,000 customers which includes £1.8 billion of social enterprise lending.
Most of these businesses had previously been turned down by mainstream lenders.
We frequently hear that growth is the government’s number one aim. It’s number two aim should be increasing awareness about the many alternative and blended lending options available which will help UK businesses unlock their true potential.
