Support or Falling Short? The Government Funding Gap Affecting UK SMEs

For many small business owners, securing affordable funding can feel like an uphill battle… I’ve been there myself. 

Accessing the right financial support isn’t just a matter of convenience—it’s a lifeline for many small and medium-sized enterprises (SMEs) in the UK. 

Recently, I had the opportunity to meet with The Rt Hon Jonathan Reynolds MP, the Secretary of State for Business and Trade, to discuss ways to transform the Government’s approach to supporting small business growth. 

We spoke about critical topics: from the gaps in the Bank Referral Scheme—a concern I raised in The Times earlier this month—to the rise of Open Finance and capital markets liquidity. 

I also shared findings from FundOnion’s 2024 SME Survey, which revealed a significant need for increased funding access, with 64% of resp identifying it as the Government’s top priority to enable SME growth. 

Yet, despite the government’s intentions, the current system designed to assist us is increasingly falling short.

The Treasury’s bank referral scheme was launched with great hopes of enhancing access to finance for small businesses. However, the findings of a recent review have thrown the effectiveness of this initiative into question. Alarmingly, 95% of businesses who were rejected from the  scheme, never manged to secure funding.This statistic is not just a number; it represents real business owners with dreams, aspirations, and the potential to contribute to our economy, struggling to find the proper funding for their small business.

Small businesses are not to be underestimated. They drive the bulk of innovation and local job creation - yet they face an uphill battle when it comes to securing support.

This clear gap prompts an essential question: Why are we not doing more to support our SMEs? The challenges facing small businesses in the UK are significant and varied, and it is imperative that we work together—government, financial institutions, and SMEs alike—to overhaul the existing framework of support. The current approach is not only inadequate but is also failing to provide the meaningful assistance that SMEs require to thrive.

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The Reality of SME Funding

The small business sector is the backbone of the UK economy, accounting for 99.9% of all businesses and employing over 16 million people. Yet, despite their critical role, many struggle to access the funding for small business necessary to grow and innovate. 

I found a recent Small Business Credit Survey that revealed a concerning stat: 59% of small businesses report being in fair or poor financial condition. The consequences are significant—without sufficient funding, SMEs may have to scale back operations, delay growth initiatives, or, in the worst cases, close their doors for good.

The response has included a variety of initiatives designed for providing government support for SMEs in the UK. One such initiative is the bank referral scheme, which mandates that major banks refer businesses they turn away for loans to independent platforms. This was supposed to be a game-changer, providing SMEs with access to alternative sources of finance. Unfortunately, the reality has not lived up to the promise. With only 5% of referred businesses successfully securing funding, it is clear that the system is not functioning as intended.

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While our platform has proven to be a valuable resource, it cannot substitute for a comprehensive, government-backed approach to funding support. We believe that a coordinated effort is necessary to create a system that truly meets the needs of SMEs. The government must take bold steps to reform the existing framework and ensure that small businesses have the resources they need to thrive.

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The Need for Government Action

The recent extension of loan support schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS) represents a positive step forward. These schemes have been instrumental in providing financial relief to SMEs during challenging times. By offering government guarantees, these initiatives encourage lenders to increase their appetite for risk, ultimately expanding the pool of funding available to small businesses. This approach is a much-needed strategy to increase SME funding support, and it has proven effective in various instances.

However, it is clear that more needs to be done. 

A fundamental overhaul of the funding landscape is necessary to address the specific barriers that SMEs face. One of the most pressing issues is the opacity surrounding credit ratings and assessments. Many business owners are left in the dark about their credit scores and the factors that may be contributing to low ratings. A credit score below 600 is often considered "bad" when seeking business loans, but what does that really mean for a business owner trying to secure financing?

Increasing Transparency in Credit Disclosure

To truly provide government support for small businesses, greater disclosure by credit reference agencies must be encouraged. Many business owners are unaware of why their credit ratings are low, and this lack of understanding can hinder their ability to secure funding. By providing clearer insights into credit profiles, SMEs would be better equipped to diagnose their financial situations and take appropriate steps to improve their creditworthiness.

Here’s my vision for how greater transparency can benefit SMEs:

1. Improved Financial Awareness:
   • SMEs would gain insight into specific issues affecting their credit scores, such as missed payments or inaccuracies.
   • Clearer credit information allows business owners to take targeted steps to improve their creditworthiness.
2. A Healthier Lending Environment:
   • By fostering transparency, we create a lending ecosystem that supports SME growth rather than inadvertently restricting it.
   • Business owners can proactively address credit issues, fostering a more favourable environment for lenders and borrowers alike.
3. Addressing Unique SME Challenges:
   • Some SMEs are denied funding for reasons beyond their immediate control, like being a newer business or having a limited credit history.
   • Even those with solid business plans can struggle in the current system; clearer credit criteria would offer these businesses a fairer shot at securing funding.

By equipping SMEs with the knowledge they need to navigate the lending landscape, we can work towards a more equitable system that genuinely supports the growth of small businesses.

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Addressing Broader Economic Challenges

I think another key area where the government can play a vital role is in supporting job creation in high-demand sectors. 

With the recent increase in employers’ National Insurance Contributions, many businesses are feeling the strain. The government should consider funding schemes that allow key sectors—such as professional services, manufacturing, and logistics—to hire staff with partial subsidies. This initiative would enable businesses to continue growing their headcount, even in a higher-tax environment.

Job creation is essential for economic recovery and stability. By providing financial incentives to companies looking to expand their workforce, the government can stimulate growth and foster innovation in critical sectors. This support would not only help individual businesses but also contribute to the overall health of the economy.

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Joining Forces for SME Growth: Time for Action

The challenges surrounding funding for small businesses are complex and demand collaboration between government, financial institutions, and SMEs themselves. Rather than assigning blame, this moment calls for collective action to build a supportive ecosystem that fosters growth, innovation, and real funding access. 

Prioritizing small businesses is essential; they are the backbone of our economy and drive immense potential for job creation and community impact. By coming together, we can establish a robust framework that ensures all SMEs, regardless of credit history or size, can secure the resources they need to thrive. Let’s work collaboratively to shape a brighter future for small businesses in the UK—one that strengthens our communities and fuels sustainable economic growth.