Chart of the month: Lending to small businesses continues to fall
Recent bank lending data demonstrates that while the cyclical effects of the financial crisis on bank lending to SMEs have largely dissipated, structural barriers remain in the market. The improvement in net lending to SMEs has been overwhelmingly driven by a higher proportion of new loans to medium-sized businesses, while net lending to small businesses remains negative. Relative to other actors in the finance market, banks are well placed to lend to low-growth, stable businesses.
However, studies have shown that lending teams struggle to assess the viability of loan applications from small businesses – particularly those with growth ambitions – meaning that these businesses are most likely to have their applications for bank lending rejected. Furthermore, innovative firms, which are most likely to become the high-growth businesses which deliver higher employment, productivity and growth, are more likely to be discouraged from applying for loans and less likely to be successful when they do, than non-innovative peers.
IPPR’s Commission on Economic Justice is examining how best to reform UK finance in order to optimise the allocation of productive investment across the economy.