Richard Davies
CEO, Allica Bank
The Government’s economic growth mission may fail if small and medium-sized enterprises (SMEs) aren’t prioritised. Discover why supporting challenger banks and fintechs is key to unlocking further SME potential.
Driving growth, job creation and innovation, SMEs are the cornerstone of the British economy. Yet, they face significant challenges to succeed. One challenge is the ability to access affordable and appropriate finance, crucial to powering their growth.
This is nothing new, but the continuing challenges in access to finance for SMEs are acting as a significant constraint on the SME sector’s growth potential and a drag on the Government’s economic growth mission, especially in the ‘established’ mid-size SME sector.
Key points for SME finance progress
The time has come for the Government and regulators to adopt a strategic shift in their approach to tackling SME access to finance and recognising three key points would help in starting to make progress.
The first is that mainstream big banks have become less focused on supporting SMEs in the real economy, and their general retrenchment from SME lending will be very difficult to reverse. The second is that evidence from countries like Australia suggests that where financial institutions are focused on the domestic economy, there is more lending to SMEs and the real economy
Thirdly, government policy and regulatory focus should shift more clearly to supporting the huge success story of the rise of challenger banks and fintechs who have a proven desire to support SMEs. These lenders make up around 60% of UK SME finance.1
Economically, SMEs
contribute significantly to GDP.
A manifesto for change
Allica Bank is building a manifesto for change. Opportunities to reinvigorate the SME finance market are almost endless, but we are focused on three themes that can be implemented in 2025 to drive sustainable growth in the UK’s local economies:
- Doubling down on SME-focused lending schemes offered by the British Business Bank (eg. significantly expanding the capacity of the Government-backed Growth Guarantee Scheme, which helps SMEs access finance to grow and invest). The UK’s scheme works well but is a fraction of the size of equivalent schemes in other countries.
- Removing competition barriers in the SME banking market. An obvious place to start here is to use new Brexit freedoms to refresh the Financial Services Compensation Scheme (FSCS) threshold to fix the broken business savings market, where SMEs are missing £9 billion in interest a year.
- Directing regulators and policymakers to focus on SME competition and growth. New scale-up units at the Bank of England and City regulators would help to ensure the continued growth of challenger banks and fintechs in supplying finance to SMEs.
Enough of being an afterthought
These key approaches will have the biggest impact on the ability of most SMEs to access suitable finance. It’s crucial they are able to do so. SMEs represent 99.9% of all private sector businesses in the UK and employ around 60% of the private sector workforce – that’s approximately 16 million people.2
Economically, SMEs contribute significantly to GDP. In 2022, they generated approximately £2.8 trillion in turnover, accounting for around 52% of all private sector turnover. The sector also plays an essential role in regional development, with SMEs often being the driving force behind local economies, particularly outside London and the South East.2
However, our view is that, too often, this part of the economy has become an afterthought in policymaking — or, even worse, sometimes forgotten about altogether. The time has come to make sure the SME economy — ‘the real economy’ — features far more strongly in policymaking, particularly when thinking about the role financial services can play in the growth agenda and the dramatic changes occurring across the SME finance market.
[1] British Business Bank. Markets Spotlight, November 2024: Small Business Finance Markets Report 2023-24. 2024.
[2] Gov.uk. Business population estimates for the UK and regions 2024: statistical release. Department for Business & Trade. 2024.
