Banks are quickly falling out of favour with SMEs, according to new research.
The survey of more than 250 SME business leaders, commissioned by Growth Lending, found that almost a third (30%) of firms are less likely to borrow from a traditional bank than they would have been previously.
Growth Lending provides funding to B2B firms in the UK including revolving credit facilities, selective invoice finance and flexible invoice discounting.
The study identified a number of reasons for this eroded confidence, with 29% saying their trust has waned because of events such as the 2008 banking crisis and banks’ treatment of businesses during the pandemic.
29% of SMEs said they would be unlikely to reach out to a bank because they had been turned down by a traditional lender in the past, while nearly a quarter (23%) said that borrowing terms from traditional banks are unsustainable for their business.
Meanwhile, 21% said they are less likely to consider traditional banks following a positive experience of borrowing from an alternative lender.
Many SMEs are turning towards alternative sources of external funding, with one in four (25%) seeking private investment to grow, ahead of the 22% looking to secure bank loans during the coming year. Plus, one in six (16%) businesses are planning to grow through invoice finance.
Yet, despite 43% describing their current need for external investment as “significant”, the ‘Don’t Bank On It’ report also found a widespread lack of awareness of alternative funding streams amongst SMEs. 16% were unaware of any form of alternative lending and 15% said they were unsure which alternative funding options were available to their business. 27% of SMEs believe there is a lack of education available around alternatives to traditional lending.
Considering that nearly one in 10 SMEs (9%) have more than £1 million tied up in late payments on average and almost half (49%) of respondents are unaware of invoice finance as a form of funding, this lack of awareness could be costing them millions in working capital.
“Traditional lenders have tightened their lending criteria and are becoming increasingly selective, favouring existing clients and established businesses,” said Lauren Couch, MD at Growth Lending.
“It is arguable that these lenders have withdrawn from all but the safest markets in the current climate and with sky-high interest rates and borrowing rates set to dramatically increase, they are becoming a less attractive or unattainable source of funding for many businesses.
“While it is positive to see that more SMEs are considering non-traditional lending streams to protect and grow their businesses, the lack of education around these options is holding many back from getting the support they need.
“As economic uncertainty continues, this is a key challenge that lenders must overcome to help the UK SME business community survive and even thrive, during difficult times.”