Accessing finance remains one of the main barriers to growth for leaders of small and medium sized enterprises (SMEs) and it is a challenge that has two potential angles for intervention – intervening to make better lenders to SMEs or intervening to make better borrowers. The question is which intervention would produce the best outcomes? Or which intervention is easiest to consider making?
I ask this question partly because it is an old question and one we still seem to struggle with answering. My father worked for the Industrial & Commercial Finance Corporation (‘ICFC’), a bank set up specifically in order to facilitate the flow of credit to manufacturing SMEs in an era when access to finance for such SMEs was stifling the UK’s economic growth. And yet it appears that we are again in an era when we recognise that there is a distinct problem of access to finance for SMEs.
It is important to explore both sides of the equation – how can you make lenders better tuned in to, and able to serve, the SMEs that are a ‘good credit’ and how can you improve the borrowing SME to make it an easier proposition to lend money to.
In this article, I want to focus on the SMEs. In our experience of working with thousands of business leaders, we see that there is certainly scope to improve the financial literacy of many SMEs in order to ensure the implementation of good financial management practices and improve their capacity to make a good case for credit/investment.
Business owners are, as you would expect, experts in their particular market or field of endeavour, but many are not also experts in business finance and, certainly in the earlier stages of their business, often cannot afford to employ specialist finance staff. Financial forecasting, its relationship to different forms of finance and applying for appropriate sources of finance, can be a steep learning curve.
Just as presenter and personal finance expert Martin Lewis is calling for financial education for young people, we believe providing impartial advice to business owners and helping them develop their skills and knowledge in regards to business finance, can often be the difference between the long-term success or failure of their business.
In 2022 there were 345,000 business closures, around 18,000 more than 2021, and the business closure rate (11.8%) was higher than the business creation rate (11.5%) for the first time since 2010.* While there are many reasons why a business might fail, in our experience, quite a lot of good companies do fail through poor financial management. You might say that they are therefore not good companies; but our experience is that small businesses are very vulnerable to shocks, have fewer resources to fall back on in the event of a customer failing to pay them and often lack the management and information systems that would persuade a lender to support them in a difficult moment.
So, is there a case for a funded programme of financial literacy for SMEs to help ensure fewer failures and more long-term success?
We currently have a team of 20 finance specialists that helps over a thousand SMEs each year to improve their financial management skills and secure external finance through our business support programmes. These fully funded programmes enable leaders of start-ups and SMEs to develop their skills and knowledge through specialist workshops, online learning and tailored one-to-one support, covering everything from writing a business plan to financial forecasting. The programmes also help business leaders to identify the right finance option for them (e.g. grants, loans, equity, debt funding, crowdfunding), apply for that finance and provide post-investment support to maximise the value of the finance secured. For example, our team has supported thousands of businesses, helping them improve their financial literacy and raise over £48.5m since 2017.
It is clear that the support we deliver does make a difference to the SMEs receiving it – they are more successful in raising finance, in surviving and in growing. Is this sort of programme of support and its beneficial impact replicable across the country? We believe it should be, particularly if the companies targeted for support are ones with high growth potential.
Through our network of 32 innovation centres across the UK and Ireland, which currently supports almost 1,000 early stage businesses operating in a variety of sectors, we also consistently find that finance remains a key area that our customers seek our support with.
With 5.5 million small and medium sized enterprises in the UK accounting for 61% of UK employment, the contribution of SMEs to the economy is significant. Could the SME sector become an even more important growth engine for the UK economy if we invested in enhancing financial literacy amongst SME leaders?
David Crichton-Miller, Group CEO
*Office of National Statistics, Business Demography: https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/bulletins/businessdemography/2022