Small firms need alternative sources of finance

12 February 2010

Sources of funding, other than those provided by the banks, may be the solution to the squeeze on credit affecting many small firms, a leading business group has argued.

As traditional forms of SME lending remain under continuing post-credit crunch pressure, the Forum of Private Business (FPB) has called on the government to examine setting up alternative financing options for small businesses that have been denied finance by the banks.

The call comes after a recent House of Commons Public Accounts Committee report, which found that banks bailed out by taxpayers' money are still not lending to businesses at a sufficiently high level.

While lobbying banks to increase the supply of business credit is still an important strategy, the FPB said that 'counter-cyclical' alternatives need to be put in place; alternatives that will be influenced less by the fluctuations of boom and recession, and that will increase choice and diversity in the marketplace.

Options, the FPB added, could include corporate bonds, leasing, invoice financing, supply chain credit and, following the recommendations of the Rowlands Review, venture capital.

The FPB also believes that the government should look at measures that would reduce small firms' dependency on external finance altogether.

Recent FPB research revealed that the major obstacles to business credit appear to be related to the banks.

The most pressing problem for FPB members involved in the research (19 per cent) was the availability of credit from banks. Other issues were the cost of finance (11 per cent) and the perception that banks will only lend to businesses if they have assets (10 per cent).

In the view of the FPB, it is important that firms be offered choice when it comes to accessing finance so that future economic downturns are not exacerbated by a squeeze on business funding.

Matt Goodman, the FPB's policy representative, commented: "Our research indicates that smaller businesses are too dependent on the banks for finance.

"At the same time, the recent crisis in the banking industry has made it clear that access to credit should be less dependent on the economic cycle. Any way of reducing the 'feast or famine' view of credit needs to be resolved before the next economic downturn."

Mr Goodman continued: "Of course, we will continue to lobby for the banks to increase lending to small firms and decide credit applications through a fairer and less centralised process.

"But at the same time, we believe the government needs to put credible alternative sources of finance in place which will reduce the monopoly on lending the banking industry has."