SME Dominated Sectors Underperform Due to Funding Dearth

By AltFi on Thursday 7 August 2014

Alternative Lending

SME lender Boost Capital has topped up the mounting pile of SME-related research produced by the alternative finance industry.

Boost Capital provides affordable loans for credible small business borrowers that might nonetheless fall just shy of the banks’ pristine credit requirements. The research produced by the alternative lender suggests that SME dominated sectors have displayed growth that lags behind the economy in general. In sectors like retail trade, construction and hospitality, contribution of overall GDP has seen a steeper decline than in other sectors between the pre-recession year 2007 and 2013. It’s no coincidence that over that particular timeframe, lending to UK SMEs has diminished by a massive £2.6 billion (from £41.8bn in 2008 to £39.2bn in 2012 – a 6% drop-off).

A breakdown of the report's findings is displayed below:

Sector

   Share of GDP fell by

   GDP contribution down (£)

Manufacturing

   0.5%

   14.4 bn

Construction

   0.85%

   11.9 bn

Wholesale and retail

   0.1%

   4.1 bn

Hospitality (accommodation and food services)

   0.2%

   1.5 bn

Marc Glazer, CEO of Boost Capital, commented:

“The real contribution and value to the nation’s economy from SMEs should never be understated. Big sectors dominated by SMEs, like hospitality and construction, have shown comparatively lower growth than other sectors. If funding for these businesses continues to be constrained, their growth and ultimate contribution to Britain’s bottom line may fall far below its potential.”

“The stunted growth, often in sectors with large numbers of SMEs, could be caused by numerous reasons given the incredibly bumpy ride for the UK economy in the last seven years. Mostly, from what we have seen on the ground at Boost Capital, SMEs are still not being given the financial footpaths to grow.”

The UK government went some way towards redressing this situation yesterday with the announcement of a mandatory referral system – in which the banks will be forced to direct SME borrowers which they find unsuitable for a loan onto alternative funding suppliers. AltFi has written at length about the benefits that this would engender for peer-to-peer lenders, crowdfunders and invoice financiers – but alternative funding providers such as Boost, Liberis and Pension Led Funding can also play a major role in filling the small business funding gap. Yesterday the government announced various moves to support the fintech space in general - a big step in the right direction for the industry. However, for UK businesses to feel the full benefit of the array of alternative funding options on offer - the providers are still in need of a major advancement in profile. 

Boost Capital has been trading in the US with parent company Business Financial Services for over 10 years. The situation stateside is not dissimilar to the UK predicament. SME lending has fallen by 17% since 2008, and SME dominated sectors are again underperforming by comparison with those supported by larger businesses. Glazer continued:

“In the US, we’ve witnessed a double impact since starting out as an alternative lender. On the one hand, the percentage of small business loans in bank portfolios has dropped from 51 per cent in 1998 to 36 per cent in 2008 and even lower to 29 per cent in 2012.5 On the other, 18 per cent of SMEs did not even attempt to apply as they did not believe they would be approved.6”

“In the UK, we’ve seen very similar trends in funding supply and demand since our launch in 2012. But, we have also seen some very encouraging signs from the Government to tackle this impact as they push towards a referral system. Businesses declined by traditional lenders can seek an alternative option which may suit their needs better in the long run.”

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