Running a business is a challenge, especially against a backdrop of an everchanging UK economy. Currently, companies may be handling many obstacles, including post-pandemic recovery, the risk of future lockdowns and COVID outbreaks, supply chain disruption, skills gaps and the pressure to meet net-zero targets. That’s not to mention the more commonplace barriers businesses need to overcome, such as cash flow issues or cost management.
For most of the issues businesses will face, support is required in the form of external funding. This can help plug any financial gaps, improve cash flow and fund the adaption of processes and structures needed to solve problems.
However, SMEs often report that they cannot get the finance they need. A British Business Bank report published in 2021 found that while 90% of SMEs had a requirement for funding, 59% experienced gaps in the provision of external finance.
With a growing need for funding, it is essential access is improved. This blog explores what we need to do to allow more businesses to get the financial support they need to survive and grow and why it matters so much.
Why is access to finance important?
The importance of financial access is that it empowers the existence of a diverse business population, in which more people can succeed and reach their goals. Better access includes enabling members of minority groups to realise their entrepreneurial ambitions, where they can serve demand and meet a broader range of consumer needs.
With more businesses able to find practical support and successfully secure it, their long-term survivability should improve and avoid business failure. With 20% of companies failing in the first year and 60% in the first three years, this could extend the lifespan of new enterprises and boost resilience across industries.
A more diverse business population benefits the public too. More customers can have their needs served in the market, with increased choice and competition that fuels innovation and drives down prices. This will also boost the economy, encouraging more people to spend money and creating businesses that pay tax, bringing lasting value to the UK.
How to improve access to finance
In order to improve overall access to finance, change is needed. This includes recognising varying business needs and funding gaps in the market. Below, we have listed some of the changes required to offer more SMEs support.
More alternative lenders
The use of alternative finance remains on the rise in the UK, with more people choosing to work with non-traditional lenders. The benefit of alt finance is that it offers broader eligibility criteria, enabling more businesses (including those from high-risk positions) to get the funding they need to move forward.
Alternative lenders also offer more flexible terms, which means more companies can identify a funding option that works for their needs and have a better range of choices when it comes to financial products.
By widening the market scope by introducing more alternative lenders, more support can be offered to businesses to fit diverse requirements. It’s also essential to make sure these lenders are reputable and can deliver value, so they can genuinely help companies.
More types of finance
Alongside the introduction of alternative lenders, there also needs to be a broader range of financial solutions in the market. Different companies will have different needs, requiring specific products that meet their objectives, including eligibility and affordability criteria.
Examples of funding types will include equity versus debt options, short-term and long-term, secured and unsecured, and so on. There may even be the need for further grants, backed by the government or other institutions, for businesses that do not want to take on debt funding.
There is also a rise in the number of directors/owners who aren’t homeowners, which limits the funding levels that lenders are currently willing to offer. This is an area that the market needs to work on as this is a growing trend.
By offering a wider variety of solutions in the market, more businesses can access support tailored to their needs and stand a better chance of fulfilling their goals.
Educate and inform
In the British Business Bank report, a lack of awareness of external finance was cited as one of the leading causes of funding disparity. Due to this, more entrepreneurs must be made aware of the role external finance can play in their business and what options may be available to them.
This means educating business owners from all backgrounds, including informing them how various options work, what needs can be solved through external funding and any potential implications.
There are many ways to do this. This will primarily include publicising financial schemes aimed at businesses, offering tools to help entrepreneurs find the support they need and pairing companies with financial advisors who can discuss the options and provide practical advice.
Address regional and sector gaps
Another theme arising from the British Business Bank was perceived regional disparities, with 79% of respondents to the survey identifying this as an issue. There may also be similar issues across sectors, with some tending to receive a higher level of funding.
It is essential to identify these gaps and alleviate the inequality faced across regions and sectors. By determining where adequate access to finance is not given, provisions can then be made to provide funding to businesses who need it in those areas.
Potential solutions for funding disparities include designated regional programmes, such as investment funds. A rise in alternative lenders will also address some of the issues. However, it’s essential SMEs in every area are made aware of the help available to encourage uptake.
This will give all businesses – across locations and industries – equal opportunities for support, which should strengthen regional economies while improving resilience across sectors.
Support minority groups
Another recurrent topic in the conversation about business finance are obstacles facing minority groups, including ethnic minority and female-led ventures.
Research undertaken by the FSB has found that, despite entrepreneurial vision and a desire for growth among ethnic minority businesses, many do not realise their ambitions. Following the research, one recommendation made by the FSB is that access to finance for these communities is increased through a specific, government-backed programme.
Work must be done to understand the barriers to minority groups obtaining finance. This also means establishing why many feel they cannot pursue their entrepreneurial ideas or what is preventing the growth of their companies.
Once this has been determined, we must ensure that they have the same access to finance as non-minority owned businesses or create tailored solutions to suit their unique needs.
While there are already some programmes for specific minority groups, including those offering finance, support, mentoring or networking opportunities, more will likely be required to serve all requirements and maintain balance.
Conclusion
As the need for business funding increases in response to the economic context, it is essential that access to finance is continually improved. This also means ensuring opportunities for ventures across all backgrounds, including minority-led, region or sector-specific, or those considered high-risk.
By offering equal opportunities for companies and ensuring their funding objectives are met, we can achieve a healthier, more diverse business population in the UK, with positive knock-on effects on the wider economy and consumers.
At Pegasus Funding, we believe all businesses should have access to the finance they need to thrive. That’s why we offer access to a wide range of solutions to help you. We can also talk you through the various options on the market and identify a route forward that meets your goals.
Get in touch today to find out more about the solutions available for you.