Innovative SMEs Restricted by Lack of Funds

Reports warn that Britain’s most innovative firms are being hampered by banks failing to lend…

Two Spheres That Don’t Touch: The relationship between British finance and British innovationTwo new reports from the think tank Big Innovation Centre, have warned that the failure of banks to lend to SMEs is stifling the country’s most innovative businesses.

According to the report, Two Spheres That Don’t Touch: The relationship between British finance and British innovationThe relationship between British finance and British innovation, between 2010 and 2012 as many as a third of SMEs said that they did not obtain any of the funding they required – that is triple the number in the period 2007-2008 just before the global economic crisis hit.

The report’s author, Hiba Sameen, has identified that this restriction of funds is a systemic problem which is, in turn, keeping the UK economy from growing.

Looking back to the years between 2001 and 2007, Sameen found that the total capital raised by the UK financial system increased by £1,340 billion. In that same period investment in innovation increased by just £26 billion.

This evidence, says Sameen, demonstrates a potential disconnect between Britain’s finance system and British innovation.

The report, published in collaboration with Nesta, suggests that the failure to invest in innovation may also have contributed to the depth of the economic crisis.

The second report, Credit and the Crisis: Access to finance for innovative small firmsCredit and the Crisis, also authored by Hiba Sameen alongside Neil Lee and Lloyd Martin, went further.

Surveying nearly 12,000 SMEs Credit and the Crisis identified that only a handful of small businesses will actually drive the economy and that the majority of small firms would have little impact on creating employment.

The report pointed out that the firms most likely to have an impact were the innovative SMEs and these were the businesses most likely to apply for funding.

Furthermore, since the start of the economic crisis, these potential drivers of the UK economy were seeing less success in applying for finance.

Restricted access to finance is not a new problem and is not just affecting the innovative businesses but the report did say that finding funds for innovation is a "significant problem".

Dr Neil Lee said of this report:

“The future growth of the UK economy depends on investment in new products and services. Yet it is harder for innovative small firms to obtain finance than their peers. A lack of finance for the firms which need it most will be a long-term drag on the UK economy. Without action from policymakers, banks are unlikely to change their lending behaviour.”

Speaking about both new reports, Sameen said:

“We would like to see government redoubling their efforts around finance for SMEs, particular those most likely to boost jobs and growth. The British Business Bank is taking steps in the right direction by promoting alternative sources of finance for SMEs, but its current scope and scale are too small to make a big difference in the finance gap for SMEs. The government needs to increase its scale by dedicating more capital to the bank, and also increase its scope by facilitating access to public corporate bond markets for SMEs.”

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