Banks have been accused of “pulling up the drawbridge” on lending to small businesses.

Research from the Federation of Small Businesses (FSB) shows that successful applications for finance among members have dropped to the lowest level on record.

Conversely, figures from the Bank of England show the annual growth rate of lending to big corporates has increased significantly since the start of the year.

Late payments are a factor

The business body has now called for a culture change in financing and has warned that economic growth will be threatened otherwise.

It says large chunks of what is available are being used to cover cashflow problems, often caused by late invoice payments.

The FSB’s quarterly Small Business Index (SBI) show just 43 per cent of applications for finance have been approved and that just nine per cent applied in the first quarter of 2022. That is the lowest number since SBI records began.

Loans used to manage cashflow problems

Of those that applied, 61 per cent sought traditional overdraft or loan products, while a quarter applied for asset-based finance, such as invoice finance.

Of the few firms that were successful in securing finance, 42 per cent plan to use credit to manage cashflow as many were badly hit by late payment of invoices.

The majority (61 per cent) sought traditional overdraft or loan products, while 25 per cent applied for asset-based finance, such as invoice finance.

Other methods included smaller numbers seeking funds through peer-to-peer platforms (seven per cent) and/ or crowdfunding (five per cent).

How can businesses improve their chances?

Measures that might persuade lenders to provide finance might include:

• Having a strong, concise and clear business plan
• Improving the credit rating
• Producing well-managed balance sheets that show the business has been well run
• Finding the right type of loan, like instalment loan, short term loan or line of credit
• Having the ability to provide collateral for the loan

Your accountant will be able to provide advice and guidance.

Investment and innovation needed

Commenting on the survey, FSB national chair Martin McTague said: “Lenders pulling up the drawbridge for small firms will threaten our already faltering economic recovery.

“Businesses are born every day across the UK – many need funding to get off the ground, ensuring they reach a stage where they’re profitable and creating opportunities.

“A lot of those who’ve worked tirelessly to adapt, survive and thrive over lockdowns need finance too, empowering them to take their firms to the next level, driving our economic recovery and the transition to net zero in the process.

“A big chunk of what little finance is being accessed is being used to manage cashflow challenges as our late payment crisis worsens, rather than for much-needed investment and innovation.”

For advice on related matters please contact our expert team today.