Last week there was much reporting on financing and growth in the SME sector. The future is bright for SMEs as on Thursday (8th June 23) CityA.M reported that SMEs are ready to invest. According to their report, 45% of SMEs are anticipating cash flow to improve over the next three months. Looking at stats over the year this rises to 55%.

When asked what this improved cash flow meant, over a third indicated they would use it to invest in their businesses. With growth on the horizon, the future is bright for SMEs. A third also stated they would look to recruit in the next six months.

The report also states that 49% of SMEs had looked to take out loans over the past three months. This is interesting because if you are an SME owner seeking financing, other news from last week could be considered a little confusing and perhaps contradictory. On Tuesday (6th June), the Banker published data from UK Finance. It indicated overdrafts and loans to SMEs by high street banks declined in 2022 by 18% to just £18.4bn. Probably not the news you wanted to hear in a slowly recovering economy when a cash injection into your SME would be welcomed.

But the same day, Trade Finance Global announced that HSBC was creating a £15bn fund. This fund aims to grow the UK SME market. Add to this the number of challenger banks being more willing to help SMEs. Therefore, the outlook may not be as gloomy as it could be. Indeed, with such initiatives, the future is bright for SMEs.

If the initial headlines are to be believed, it seems that the decline in lending to SMEs can be attributed to increasing levels of economic uncertainty. However, is there more to it? We asked Nick Butler, director and banking and finance lead at Farringford Legal his thoughts.

Banking regulation, in the UK and elsewhere, is more stringent than it ever has been. And in my opinion, larger banks are more concerned about regulation than smaller banks. Probably because they have more to lose.

Add to that the new FCA UK Consumer Duty requires ‘firms’ (i.e. lending banks) to provide ‘good outcomes’ to ‘retail customers’ (which means any customers other than large corporates/FI’s/governmental entities) and to be able to demonstrate that they have done so. This may lead to a desire by high street banks to pull back from lending to SMEs, so they can avoid the additional regulation/pain that comes with lending to smaller/non-sophisticated entities.

Additionally, one of the requirements of the new Consumer Duty is that the products sold, broadly, must provide ‘fair value’. So, if you are a bank, it is more attractive to lend to a large corporate at a very good, negotiated rate rather than a small retail customer where you have to go through many hoops to be able to demonstrate the ‘good outcomes’ that you have managed to deliver.

I personally welcome the news from HSBC which indicates confidence in the SME market. I hope other high street banks follow suit. However, we are finding our clients are increasingly seeking funding from personal contacts, venture capitalists, regional grants, and other alternative schemes.

So, what does all this mean to an SME owner?

Firstly, the optimism in the sector is encouraging. Despite the overall economy struggling post-Covid, an SME’s natural agility should help a faster recovery. This proves that the future is bright for SMEs.

Secondly, despite the increase in regulations, the HSBC news will hopefully lead to other high-street banks following suit. They might gain confidence in the sector.

And finally, if you are an SME owner there are options available to you outside your bank to enable growth. These can often create new profitable collaborations and offer better value for money.

If you are looking to understand the kind of funding schemes and options available to SMEs read our recent article.