Small businesses 'need more diverse lending'

The UK's small businesses have been described as one of the keys to the UK's economic recovery, yet concern remains that they are finding it too difficult to get the funding they need from traditional financial institutions.

According to David Davis and John McFall - both politicians and board members of the New City Network - UK firms need to find innovative ways to get moving without relying on the continually risk-averse banking industry.

In an open letter published in the Financial Times, the pair declared that for British business "to catch up we need a growth agenda that creates jobs and a diverse financing system that breaks the banks' stranglehold on lending. New research shows how to do so".

As recent job metrics have shown, financial jobs are being created in non-traditional areas and if plans to increase the base of funding available to small businesses go ahead this trend could be set to continue.

According to research from the New City Network, 93 per cent of businesses not given loans only approached banks in their search for funding, rather than diversifying their potential options.

With UK businesses boasting some £750 billion of deposits on their balance sheets, Mr Davis and Mr McFall feel the obvious move is to see larger companies invest in partnership with small to medium-sized enterprises (SMEs) and start-ups.

"Debt can be used very successfully and access to the bond market for more mature SMEs should not be overlooked, but we have become too focused on one type of funding," they added.

The pair concluded their letter by calling for the financial services industry and policy makers in government to make major strides in diversifying the sources of funding available to firms or see the economy continue to stumble over the coming years.

Lending to businesses fell by £5 billion in the three months to February of this year, according to the Bank of England's latest report, highlighting the scale of the problem facing the UK.

• http://www.ft.com/cms/s/0/acb89d4c-efcd-11e2-a237-00144feabdc0.html#axzz2aWJsSJJ9