ICAS report: Regional bias in SME finance?

By Ian Harper, CA Magazine

9 August 2017

Ian Harper drills deeper into the ICAS “Reluctant Borrowers” research, to look at some of the reasons why SMEs are reluctant to raise debt-based capital.

As previously discussed, the recent ICAS research report Reluctant borrowers? Examining the demand and supply of finance for high-growth SMEs in the UK finds high-growth SMEs are reluctant to borrow. But what are their misgivings based on?

Much has been said about a regional funding bias, but our experts feel this may affect borrowing less than equity finance.

Alistair Dickson, a Partner at RSM UK, says: “There could be a sense of money following money, and as the majority of GDP is created in the south-east [of England] there could be a north/south bias regarding appetite to grow or to take on risk. 

"However, the regional business profile, affluence and opportunities in the area will come into play so lenders outside the south-east may take a more conservative approach to lending.”

There’s definitely a north/south equity bias. 47% of all equity deals were conducted in London in 2015.

Joel Perlman, co-founder and Chief Strategy Officer, OakNorth Bank, agrees: “When it comes to debt finance there doesn’t appear to be a north/south bias as bank lending tends to mirror the distribution of businesses across the UK.”

However, when it comes to equity finance, he says: “There’s definitely a north/south bias. In its research published earlier this year the Institute for Public Policy Research found that 47% of all equity deals were conducted in London in 2015.”

A key recommendation of the ICAS report relates to the British Business Bank’s (BBB’s) enterprise finance guarantee scheme (EFG).

The EFG scheme

EFG underwrites 75% of each loan made to an SME by a participating bank, subject to an overall ‘cap’ on the percentage guaranteed of all EFG-related loans by value in the portfolio which, for one reason or another, SMEs can’t repay. This cap or maximum ‘default rate’ is currently set at 15% and the ICAS report recommends raising it.

Judith Hartley, MD lending solutions at the BBB, told us: “Actual loss rates for EFG vary between lenders but in aggregate are running well below the 15% maximum claim limit discussed above, and are forecast to remain below the 15%.”

This indicates lender conservatism, implying many more SMEs could benefit from the EFG than at present – and so overcome the issue of personal guarantees.

Brown says: “Academic evidence has shown this to be a very effective means of improving access to finance in SMEs. However, the manner in which it operates by the UK’s main banks may be undermining its effectiveness.”

Brown points to anecdotal evidence which suggests some of the banks still require personal guarantees in addition to the guarantees provided under the EFG scheme. He also points out that it appears that the low level of defaults within the portfolio of SMEs supported by the scheme is being underutilised.

The EFG has its critics, including Magee: “There are five million SMEs in the UK which are the backbone of the economy. Fewer than 1% have received EFG – the scheme specifically designed to support SMEs. The shocking statistics show that it simply isn’t working.”


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