Saturday, June 29, 2013


With a devolved system of government within the UK, there has been increasing interest in the role of SMEs as engines for developing prosperity and growth at a regional level. In Scotland and Northern Ireland, the devolved administrations have commissioned two reports that have specifically examined the financial environment within each nation.

In its study, the Scottish Government  focused specifically on how to develop a strategy to set out the key principles of a “sustainable, responsible and healthy banking sector in Scotland, including providing access to finance for SMEs.

In contrast, the Northern Ireland report  focused more specifically on the availability of finance to SMEs in order to establish the support currently available, the level of uptake and the potential reasons for any deficiencies in the market.

To date, there has been no detailed review undertaken on access to finance for SMEs in Wales. Following representations from various small businesses on the problems in accessing funding from the banks, the Minister for Economy, Science and Transport announced an independent review of the availability of funding for SMEs in Wales on 16th January 2013.

Supported by a voluntary advisory panel  from academia and business, the aim of the review is to examine how effectively SMEs in Wales are served by existing sources of funding, identify areas of particular challenge and provide recommendations for action. This would include the following areas:

  • Whether Welsh businesses are less successful in accessing bank funding compared to SMEs operating in other areas of the UK;
  • What particular characteristics of Wales might explain any discrepancies identified;
  • How UK Government initiatives can benefit Welsh businesses’ ability to access finance;
  • The role culture plays in Welsh business’ appetite for growth and risk;
  • How to ensure Welsh businesses maximise their chances of securing funding from existing sources;
  • How to address any barriers that exist to UK and international investors funding more businesses in Wales;
  • What international best practice solutions might be considered for Wales.

During the last four months, an extensive consultation with over 90 representatives of the banking sector and other financial institutions, the Welsh and the UK Government, intermediaries, academia and businesses has been carried out. More detailed discussions have also been held with members of the Institute of Directors (IOD), Confederation of British Industry (CBI) and the Institute of Chartered Accountants for England and Wales (ICAEW). The Welsh Government also conducted an online consultation on its website and over 30 responses were received including a detailed response from the Federation of Small Businesses (FSB). The consultation exercise has been supported by a substantial amount of data collated from various sources including Welsh Government, Finance Wales, individual high street banks, the Bank of England, British Bankers’ Association (BBA), Department for Business, Innovation and Skills (BIS), FSB, IOD, HM Revenue and Customs (HMRC), the Office of National Statistics (ONS), NESTA, the British Private Equity and Venture Capital Association (BVCA) and various universities within the UK and abroad.

This first report therefore analyses the current situation regarding the access to finance of SMEs in Wales, focusing specifically on the role of banks. It also presents information on other forms of finance that are available to SMEs. As part of the review, a number of preliminary recommendations regarding access to finance in Wales, a number of which the Welsh Government should implement immediately to improve the current situation and others that need further consideration as part of the second stage of the review. These are as follows:


1. Welsh Government needs to ensure that Wales, and Welsh businesses, gets a fair share of funding from the new Business Bank given concerns that the funding will not be distributed regionally across the UK and may be concentrated in the more prosperous areas of the UK.

2. For both loans and overdrafts, smaller and younger SMEs remain less likely to have been successful in securing funding from their bank. If banks continue to have difficulties in fulfilling the lending role for this part of the business community in the future, other forms of funding will need to be considered for smaller firms, especially micro-businesses. The Welsh Government therefore needs to consider whether mechanisms such as micro-lending or community-based lending to smaller local businesses should be encouraged and supported.

3. Security against the loan and affordability of repayment, rather than the cost of borrowing, have been cited in the interviews with banks, intermediaries and small businesses as being one of the main obstacles to accessing bank finance. To date, the Enterprise Finance Guarantee Scheme (EFG) has done little to address either issue especially for smaller businesses. Therefore any intervention by the Welsh Government should focus on these two critical obstacles.

4. Local decision-making by banks is seen by many businesses as critical in ensuring that their business case is considered fairly. Yet there is very little evidence of this happening with higher-level credit decisions being made outside of Wales. Given this, Welsh Government is encouraged to open up discussions with the main banks to ensure that Welsh regional managers make the final credit decisions for all Welsh businesses.

5. There needs to be greater transparency in the lending process. This is to ensure that SMEs, especially those without any formal financial support internally, know exactly what is required in terms of preparing an application to the bank (business plan, cash forecasts, support from an intermediary). In exchange for the provision of this information, banks would then agree to examine each potential funding request in more detail as opposed to basing their decision using the credit-scoring software that is normally applied to the majority of applications.  Such “a banking covenant” could ensure greater transparency and accountability within the lending process and Welsh Government could work with the BBA to pilot such a scheme in Wales.

6. Welsh Government should examine the disconnect between the business support programmes it offers and the funding supplied by the banking community in Wales.  It needs to consider how it can work more closely with banks to ensure that they recognise the support available to Welsh firms and by promoting its take-up, improve the quality of business proposals and information supplied to the banking sector. This could be achieved in a number of simple ways such as having regular meetings between the banks and Welsh Government officials and encouraging the development of specialist managers and support providers in the key sectors identified by the Welsh Government.

7. Welsh Government should raise the issue of the detrimental effect of Basel III rules on SME lending directly with the UK Treasury and BIS. This will enable the UK Government to make representations directly to the Basel Committee on Banking Supervision to recommend that SME lending should be excluded from consideration in terms of determining suitable capital and liquidity within the banking system.

Other forms of funding

8. Welsh Government should examine how it can help facilitate better access to the wide range of commercial lending opportunities that are available to SMEs through non-bank lending channels. This could be achieved through partnership with organisations such as the NACFB and the development of a specific commercial portal on lending for SMEs.

9. There are currently low levels of informal investment in Wales that could be addressed by (a) raising awareness of equity investment by angels as a viable form of funding amongst growing SMEs and (b) developing an equity guarantee scheme to attract further investment by private individuals into Welsh businesses. These potential interventions, and the role of Welsh Government in supporting them, will be explored in further detail during the second half of the review.

10. Finance Wales has had a positive impact on formal equity investment within the Welsh business community. However, the Welsh Government will need to consider how it builds on this success, especially in terms of having a specific vehicle for equity funding in the future. It also needs to develop programmes that create demand for venture capital not only for new start-up businesses but also growth firms where equity investment is key for further development.

11. The lack of availability of trade credit is an issue that leads to many smaller businesses seeking short term funding for working capital from banks.  The Welsh Government should explore how it can use its power as the biggest purchaser in Wales to encourage its own suppliers to adopt supply chain finance or similar schemes to support their suppliers. In addition, it could set an example by ensuring that all contractors operating within the public sector in Wales have to pay their suppliers within a maximum 30-day period (and ensuring that it adheres to such a policy itself). With over £4.3 billion being procured via the public sector, this could have a major effect on the cashflow of a significant number of smaller businesses. The Welsh Government could also build in such conditions into other programmes that it currently manages.

12. Further discussions will take place with building societies in Wales to assess their potential role in supporting SMEs to access finance, especially in terms of commercial property lending.

13. The Welsh Government should examine how UK Government funds can be used more effectively to support businesses in Wales, potentially through the provision of matched funding through its own resources. In particular, as it currently does not provide any loans to those start-ups that create the vast majority of jobs in the economy, the Welsh Government needs to develop an appropriate mechanism for this type of support, based on the Start-Up Loans programme operating in England, although this should be applicable to all new businesses and not only those started by 18-30 year olds.

14. There is a major opportunity for Welsh Government to take the lead in supporting alternative sources of funding such as peer-to-peer lending and crowdfunding, either through partnership or direct funding. It could also raise awareness of both types of funding through its various business support programmes.

Finance Wales

15. As the sole shareholder, Welsh Government needs to determine the future strategic direction of Finance Wales and, more importantly, the role it should play in the future financial landscape for Welsh business alongside other providers.

Data Collection

16. This review has shown that there is a lack of regional data, especially for Wales, as a devolved nation. If policymaking within the Welsh Government is to be based on evidence, then it is critical that UK organisations in both the public and private sector are made fully aware of the implications of devolution and the need for accurate data being collected at a regional level.