The SME Financing Gap

13 October 2012 DueDil Team

With the recent focus on the financing difficulties faced by small- and medium-sized businesses in the UK, we decided to conduct our own study into this ‘financing gap’, and to try and determine both the scope and magnitude of the problem.

In order to do this we aggregated quantitative data from recently published reports by leading bodies including BIS, the Bank of England, OECD, and others. We used these official figures as a basis for further calculations in order to obtain an estimate of the total UK and European financing gaps to small and medium enterprise, and to try and estimate the impact of this gap on the UK economy.

Up to 350,000 small- and medium-sized businesses (SMEs) are being affected by an annual financing gap of up to £24.9bn in the UK, according to figures from Duedil. Were this gap to be bridged as many as 670,000 jobs could be saved or created annually.

We project that these 670,000 jobs would boost the UK’s GDP by a total of £43bn a year. This figure corresponds to approximately 3% of total UK GDP, which has been contracting by around 0.4% for the last three quarters. This boost would undoubtedly contribute to helping the UK economy emerge from its recession and is close to the amount spent by the UK government every single year just in order to finance the country’s national debt.

Despite accounting for 99.9% of all UK businesses by number, 48.8% of all turnover and almost 60% of all employment, UK SMEs have seen their access to external funding shrinking since 2009, with net bank lending to SMEs contracting again in the three months to May 2012 . Additionally, a recent survey by the Federation of Small Businesses found that 42% of small firms who applied for a loan were rejected .

With banks less willing to takes risks and credit harder to come by, Duedil believes that this gap is only likely to be bridged through a combination of new government measures and alternative methods of financing. Peer-to-peer lending (such as UK-based Funding Circle), equity financing (including crowdfunding) and online receivables exchanges (such as UK-based MarketInvoice) are innovative approaches that are well placed to play a significant role in bridging the financing gap.

To download the full report click here.