By FintechOS · October 31, 2022
8 minute read

SME Finance Charter: what the UK pledge means for the industry

SME Finance Charter: what the UK pledge means for the industry

The UK’s new SME Finance Charter is a mission statement for supporting small businesses. We worked with our SME banking fintech partner, Codat – the universal API for small business data, to look at what the Charter means for SME banks and commercial insurance providers across the globe.

Codat recently published research into the SME space, and explained to us their view of the landscape for SME lending:

73% of SMEs (small- to medium-sized enterprises) have a negative perception towards applying for credit, and almost half (47%) of SMEs who would like to access funding have difficulty doing so.

One of the main reasons that SMEs don’t borrow is due to an off-putting application process – surveyed SMEs say the existing system is expensive (39%), complex (26%), and decisions are based on out-of-date information (12%).

This negative sentiment has meant that thousands of SMEs in need of credit are not borrowing, resulting in a GBP 22-billion funding gap in the UK, according to Bank of England estimates, which is hindering economic growth. Urgent action must be taken to reduce this gap and some initiatives have already begun to address rebuilding trust, and overturning these negative perceptions.

One such initiative is the SME Finance Charter, a voluntary agreement among finance providers to support SMEs in the UK. In this article, we explore the background of the Charter, what it means for the industry, and how it’s helping lenders come out ahead with customers in a competitive market.

The history of the SME Finance Charter

The SME Finance Charter was initially introduced on 9 October, 2019, and was intended to support SMEs through the impact of Britain leaving the European Union. By 17 October 2019, a list of lenders had signed up to the Charter, and links to their commitments were added. The original charter has now been refreshed to help SMEs cope with the aftermath of the COVID-19 pandemic, widespread supply chain disruption, and escalating input costs.

It has been a challenging time for small- and medium-sized businesses and some are still navigating through these challenges. They need to know that there are trusted lenders who are there to support them so that they can continue to focus on managing and growing their businesses, rather than balancing the books.

Ant Persse, CEO of Optimum Finance and Saltare.

Trust in financial institutions has not been unwavering in recent years. According to Codat’s research, 58% of small businesses say they trust their high street bank, while less than a fifth (18%) trust alternative or new online-only lenders. How can financial providers improve this situation? By showing, and acting on, a strong message of support.

SMEs, like all businesses, need finance to get started. Although this may often come from the owner, investors, or past profits, many turn to banks and other financial providers to get the much-needed cash injection. It’s the businesses that rely on outside finance that are likely to prefer lenders who have agreed to the five principles of the Charter (outlined below). During times of uncertainty like in recent years, having access to financial support is paramount, particularly for small businesses.

The new SME Finance Charter

The revised Charter boasts considerable gravitas, having been approved by:

  • former Chancellor of the Exchequer Kwasi Kwarteng in his previous role as the Secretary of State for the Department for Business, Energy and Industrial Strategy
  • the government’s Business Finance Council, which includes representatives of business trade associations

Put simply, the SME Finance Charter is a commitment by finance providers to offer support to the small businesses of the UK through Brexit, COVID-19, and beyond. It is made up of five key priority pledges for areas that have been identified by the government and lenders in ensuring that SME finance works effectively.

With a multitude of pressures facing businesses currently, the SME Finance Charter is very welcome. SMEs are a key driver of employment and economic growth. As businesses emerge from the pandemic and face a new set of challenges, clarity, communication and signposting are critical to help them capitalize on future opportunities.

Simon Gray, ICAEW’s Head of Business

What is the Business Finance Council?

The Business Finance Council represents business trade associations to the government, and was a major approver of the Charter. The Council works with finance providers to make certain that SMEs can access the funds they need to grow and be successful. It is jointly chaired by the BEIS Secretary of State, the Economic Secretary to the Treasury, and the Minister for Small Business, Consumers, and Labour Markets.

Members of the Council include major lenders and providers of alternative finance, UK Finance and the Finance and Leasing Association, the British Business Bank (the government-owned business development bank dedicated to making finance markets work better for smaller businesses), and Business Representative Organisations.

The Council’s remit includes:

  • the sharing of relevant information about the lending market for SMEs, particularly the availability of working capital
  • assessing the effectiveness of actions in the pipeline to support SMEs in accessing finance, including advice and mentoring
  • supporting the use of programs offered by the British Business Bank (BBB)
  • making certain that details provided to businesses by the government and finance providers are aligned, consistent, and accurate
  • making recommendations to banks, finance providers, and businesses
  • acting by consensus among its own members where this is judged to be effective

The aim of the SME Finance Charter

The aim of the SME Finance Charter is to educate, inform and re-assure consumers. It includes topics such as how UK lenders plan to support their business customers and what this means for SMEs, as well as allowing consumers to check if their lender has signed up to the Charter and compare against how other lenders are responding. It’s clear to see that signing the Charter offers benefits for lenders.

We’re proud to be working with the UK government as part of the Business Finance Council, and we are committed to the updated SME Finance Charter to ensure small businesses continue to receive support and access to the finance they need to grow.

Funding Circle

A guide to the five principles of the SME finance charter

The Charter is made up of five principles that reflect the areas that government, finance providers, and businesses have identified as being significant in ensuring that SMEs are supported.

Once signed up to the charter, each signatory is to set out their own commitments on how they will deliver against the five pledges. The majority of these lenders display their commitments clearly on their website, allowing SME owners the opportunity to review a range of providers, compare different financial products, and choose the one that is right for their business.

The five pledges are:

1. We’re open for business and ready to lend

The first pledge of the SME Finance Charter is that lenders should be explicit about what they offer to businesses, such as the type of applications they are looking to support. They should state that their company is committed to responsible lending and that they put the interests of their customers first.

2. We’ll help you build back better after COVID-19

Having supported businesses via government-guaranteed COVID-19 business loan schemes to the tune of GBP 75.1 billion, lenders should now be able to supply resources to help SMEs build back up. These could include web resources, fact sheets, videos, and workshops along with opportunities to gain face-to-face advice.

3. We’ll support your application and signpost other options if needed

Lenders should describe what they look for in an application (management accounts, cashflows, and any security requirements), and explain the options that would be open to customers if their application is declined.

4. We’ll treat you fairly at all times

For this pledge, lenders will want to detail their commitment to treating customers fairly and how they can resolve any disputes. Lenders may wish to sign up to an independent scheme such as the Standards of Lending Practice for business customers, the Finance and Leasing Association’s Business Finance Code, or the Invoice Finance and Asset Based Lending Standards Framework. They should be ready to help their customers through the variety of challenges and opportunities that come with running a business.

5. We’ll work with the government-owned British Business Bank

The British Business Bank is concerned with ensuring finance markets work better for SMEs. Finally, the SME Finance Charter states that lenders should signpost the BBB’s Finance Hub and the Institute of Chartered Accountants in England and Wales’s Business Finance Guide, which offers details on finance options.

In conclusion

The UK SME Finance Charter has been designed to promote education and clarity to SME owners looking to re-build and grow their businesses after a turbulent few years. The five pledges enable lenders to re-assure business owners that they are ready to support them post-Brexit and post-COVID-19, give guidance on the application process, treat customers fairly, and promote resources from the British Business Bank.

A number of lenders have signed up to the SME Finance Charter, including the Bank of Scotland, Barclays UK, HSBC, Lloyds Bank, NatWest, RBS, Santander UK, and Virgin Money UK, among others. Should your company be among them? That’s up to you, however, the benefits of offering small businesses a strong message of support are clear.

To find out more about how we’re working with Codat to empower you to offer innovative, digital SME loans, book a demo.

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