This report explores SMEs' access to finance and includes short profiles of firms working in innovative ways to channel credit to small businesses.

Key findings:

• Key trends among smaller firms include: the declining use of external finance; the increasing cost of loan finance; and the fact that many – although keen to expand – are investing merely to maintain a ‘steady state’.
• Innovation might encourage more SME lending: there may be potential for something like a bond market for SMEs to develop from the peer-to-peer lending model; asset-based lending could provide more early-stage funding; and asset-based lending exchanges could help small business borrowers. 
• More external advice, appropriate levels of regulation, and attractive tax incentives could all encourage a flow of finance to smaller firms. 

Funding for small businesses has been an issue that has attracted regular public policy initiatives.

As early as 1931, the Macmillan committee on Finance and Industry identified a gap in the provision of long-term capital to smaller businesses, in the context of concern about whether British banks served domestic industry well enough. The result was the creation of the Industrial and Commercial Finance Corporation to finance small businesses, a forerunner of 3i.

While equity finance was the main theme of that initiative, the provision of credit by banks to business has topped the recent agenda. This report therefore focuses on the issue of credit, and the case studies described in this report and the lessons drawn from them address the issue of channelling credit to small companies – and potential changes to the way the credit market operates.

Author: 
Andy Davis