Ministers to Meet Bank Chiefs Over Small Business Lending

Senior executives from leading banks, including HSBC, NatWest, and Lloyds, will meet with UK ministers this week to address growing concerns over restricted lending to small and medium-sized enterprises (SMEs). The discussions come as the government focuses on supporting its growth strategy amidst widespread criticism over limited access to affordable credit for struggling small businesses.

Government representatives, including Gareth Thomas, the small business minister, and shadow chancellor Rachel Reeves, have expressed growing concern that tighter lending restrictions are impeding the ability of SMEs to invest and scale. Business leaders have criticised high street lenders for implementing stricter lending criteria, including requiring personal guarantees and centralising loan approvals, which has weakened local relationships between SMEs and bankers.

The Department for Business and Trade (DBT) recently reported that loan approval rates for SMEs now stand at less than 50%, a sharp decline from 67% in 2018. Many small businesses have turned to high-risk private lenders outside the traditional banking sector as a result of being denied funding by mainstream banks. The DBT has suggested that rejection rates may be excessively high and is exploring possible reasons for this trend.

Banks are expected to argue that lending to SMEs remains inherently risky and have called for the government to expand its support measures. Currently, the British Business Bank underwrites up to 70% of eligible loans to small businesses. Industry body UK Finance has proposed a significant increase in funding for such schemes to encourage banks to boost lending to SMEs and reduce concerns about financial losses.

The Treasury committee has also highlighted growing issues around banking practices affecting SMEs, including widespread account closures. Reports indicate that in 2023 alone, some 140,000 SME bank accounts were closed without adequate explanation, leaving business owners uncertain and unsupported.

Looking to the future, there are calls for the promotion of mutual lenders, who play a vital role in SME funding in countries like Germany. Mutual lenders are seen as a potential solution to the growing funding gap afflicting UK SMEs, with minister Gareth Thomas advocating for their inclusion to provide more accessible credit options across the sector.

With SMEs bearing the brunt of economic challenges from the pandemic, high energy costs, and inflation, this week’s discussions will play a critical role in determining whether the government will make strategic adjustments to lending regulations and increase support to revive the struggling sector.