A report published this month by the cross-party think tank Demos has found that a major regional imbalance exist between the number of small and medium-sized enterprises (SMEs) in the North and South of England successfully applying for finance from banks - with rejection rates unsurprisingly highest in some of the most deprived areas.

Chicken and egg

Rejection rates for SME lending are highest in Yorkshire and Humber, the North East and the North West. By comparison, entrepreneurs in the West Midlands, the South East and the South West are far more likely to be granted funds. Figures from the ONS show that excluding London, the five-year survival rates of businesses tend to be lower in the areas with the lowest loan application rates.

This raises an inevitable question of chicken and the egg. Banks use statistics to drive lending decisions, and the survival rates of businesses in certain areas has a negative impact on credit scoring models, and thus banks’ desire to lend to businesses in these areas. However, if the banks supported businesses in the North of England more, this would almost certainly have a positive effect on businesses’ ability to ride out rough patches – be they caused by macroeconomic or business-specific factors.

This is an issue that needs to be addressed. Numerous studies have shown that SMEs constitute a fundamental cornerstone of any strong economy, meaning that any funding gap needs to be closed to ensure a dynamic and flourishing market across the UK. Germany, known to have powerful SMEs that support the economy, suffers an 80 per cent lower rate of SME rejection from banks than that of UK businesses.

Outshone by our European peers

While many see London as the epicentre of business and innovation, there are now a number of thriving regional hubs with potential for further growth. However, with inadequate access to finance a clear problem in many UK regions, many of these businesses are unlikely to reach their full growth potential and risk faltering altogether and filing for administration – in turn weighing on local economic growth, and importantly job creation.

The Demos report suggests that the UK should look at adopting the German Sparkassen model of banking, using the British Business Bank to act as an investor in local level institutions across UK regions. Sparkassen, or 'savings banks', only lend within their local areas, and have a duty to promote growth within these. It is largely as a result of this that the country boasts some of the lowest SME bank loan rejection rates in Europe, while the UK rate is above the European average – higher than Spain, Italy, and Portugal. Strikingly, the UK trails only the Netherlands, and embattled Greece for SME finance rejections.

Alternatives exist

While the robust health of the German economy demonstrates the positive impact of this system, SMEs across the UK do not have to wait for a banking overhaul to access funds for growth. Alternative finance has become increasingly mainstream and is democratising the business financing landscape. While most banks will still require a number of face-to-face meetings within structured opening hours to grant access to funds, the digital nature of alternative funding platforms makes them far more accessible. Businesses from every corner of the country can access our platform – and look into the service we provide at a time that suits them.

Earlier this year, for example, we helped CIP Recruitment raise the funds required to open a North West headquarters. Despite being a profitable businesses, with growing revenue, they were rejected for bank funding. Since taking on the finance, they have increased their headcount by 20%, employing an additional 25 more people.

By David von Dadelszen, Director and Head of Operations, UK Bond Network