New research warns that the £90 billion “loan gap” in the UK banking system limits investment, productivity and economic growth by depriving small and medium-sized businesses of vital finances.
A report by professional enterprise lender Allica Bank found that over the past four decades, persistent credit shortages have emerged, with bank loans to small and medium-sized enterprises drastically below historical trends. The study shows that a huge shift to low-risk, property-backed loans have created a dysfunctional financial market that has left many service-based businesses unable to access the funds they need.
According to Allica, today's SME loans are £90 billion lower than the levels recorded between 1997 and 2004. Growth in non-bank financing helps close some of the gap, but a “substantial” £65 billion credit shortage remains.
One of the most obvious signs of the transformation is the collapse provided by small companies overdrafts. In 1998, overdrafts accounted for 31% of SME bank loans; today, they accounted for only 5%. Instead, loans have increasingly focused on business loans targeting assets (usually property) without the need for tangible collateral efforts to borrow money or working capital.
The economic transition from the UK to a service-led model has exacerbated the problem, with many modern SMEs having very few physical assets. Thinner loan profit margins and regulatory pressures have further driven banks toward highly secured, low-risk lending practices.
The consequences of economic vitality are serious. A survey by the Bank of England earlier this year found 77% of SMEs want to accept slower growth rather than borrowing to expand. The Allica report warns that this risk aversion, affected by reactive financial markets, is curbing productivity gains and preventing broader growth ambitions from governments.
“If we want to address the government's growth mission, we need to restart the UK's SME financial market,” said Richard Davies, CEO of Allica Bank. “Record SMEs are seeking financing. The UK was an outlier in the 1980s and 1990s and in comparison with internationally compared countries' historical loan application rates.”
Davis said the current lending model has a serious spin around real estate collateral, which simply doesn't match the reality of the modern British economy. “The result is that SMEs are investing in ‘production credit’ to increase productivity and grow their businesses. We must get rid of the long-term cycles we find ourselves. Established SMEs are the key force driving the next wave of economic renewal.”
To address this, Davis called for a rethinking of the regulatory framework, urging the Bank of England to pay more attention to financing for SMEs and ensure regulatory requirements do not unnecessarily curb loans from small banks and challenging institutions.
Allica warned that without reform, the UK could continue to curb investment and growth potential in key sectors, a time when new economic momentum was urgently needed.
