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Proposed updates to UK bank capital rules: What this could mean for SMEs

Bird trying to cross a broken bridge to become a unicorn

The Bank of England’s proposals could disproportionately impact SME lending – here’s what you need to know:

Following a period of particularly challenging time for UK SMEs, the last thing the sector needs is another sting that could disrupt access to capital and cripple growth.

But unfortunately this could be exactly what is on the cards, as the Bank of England has proposed changes to bank capital rules that could have a disproportionate impact on SMEs…

What is the “Supporting Factor”?

Far from a Simon Cowell-inspired reality TV showdown, the Supporting Factor refers to the relaxation of some EU lending rules, specifically for SME borrowing.

These rules – known as Basel III – were updated following the 2008 financial crash to strengthen regulations around bank capital to ensure banks improved their risk management. Ultimately with the aim of avoiding another mass taxpayer bail out.

But in 2014, the EU introduced the SME “Supporting Factor”, the equivalent of an SME-sized loophole to Basel III that enabled banks to relax bank capital rules when lending to smaller businesses.

What is changing?

But now the Bank of England is considering removing the supporting factor, a move that could result in a reduction in SME lending of up to £44bn, according to new research from Oxera on behalf of Allica Bank.

This change is one of a suite of proposals from the Bank of England’s Prudential Regulation Authority, but with UK bank lending to SMEs topping £200bn, it could potentially wipe out more than a quarter of current SME lending.

What does this mean for SMEs?

In a nutshell, it could make it much harder for SMEs to raise cash.

As a sector of UK business that already struggles with access to capital – and the subsequent growth hurdles that come with limited cash flow – this news is the latest in a series of blows to growing UK firms.

UK Finance, The Federation of Small Business and The National Association of Commercial Finance Brokers are among those to oppose the change: “Without [the supporting factor] the cost of lending to a critical component of the UK economy will increase and lending appetite reduce,” UK Finance said in a statement.

Is there an answer?

The Bank of England has made it clear that no firm decisions have yet been made and Oxera’s report will be one among many that outlines a variety of capital management strategies that banks could use to mitigate the change without a total collapse of lending to the SME market if it does come into place.

However, Oxera also suggests that increased activity from non-bank lenders could be an alternative solution, as these lenders are not tied to the same regulations and their SME lending appetite would therefore not be impacted in the same way.

Non-bank lending to UK SMEs has already hit the £6.26bn threshold and many of these lenders, Growth Lending included, were founded on the very basis of better-serving the SME community with the type of specialist lending knowledge that cannot be matched by more traditional lenders.

“If you operate in the alternative lending space, the concept of increasing SME awareness of non-bank lending is a frustrating one. We know we are well-positioned to support the needs of growing SMEs and like many of our peers we have specific expertise at lending to these types of businesses,” says Lauren Couch, Chief Revenue Officer at Growth Lending. “Yet getting this message out to SMEs, to advisors and to corporate finance professionals continues to be a challenge.”

“If these proposals are introduced, we lenders must do a better job of educating SMEs on the options that are out there – but I would also advise any SMEs considering fundraising within the 12 months to get ahead of the competition and start speaking to non-traditional lenders now, before the market becomes even more challenging.”