Call for new UK Labour government to introduce SBA-style business loans

With UK SMEs continuing to face an uncertain economy, low consumer confidence, high prices and, perhaps most damagingly, a lack of access to growth capital, a change of government does at least provide the chance of establishing a little more stability.

However, the new Labour government will still be faced with the fact that the UK’s vital ecosystem of small and medium-sized businesses are struggling to achieve their growth potential due to adverse conditions and a lack of funding.

Access to capital to invest in their businesses, tap into new technologies and make acquisitions that can drive rapid growth can be transformative for SMEs. However, in the current environment, traditional lenders have become more reticent and the clamour for other sources of funding (e.g. private equity backing) means that competition is fierce.

Without access to this vital financing, companies are at risk of entering a malaise, squandering their growth potential and maybe even failing completely if they are not able to grow their revenues and attain strong profitability.

A report from the Government’s own Treasury Committee recently noted that SMEs are rapidly losing faith in their ability to access financing: “Confidence amongst SMEs in accessing finance has fallen and acceptance rates for business credit has lowered significantly.”

While there are alternatives for SMEs seeking growth capital, most notably the government’s Growth Guarantee Scheme (the latest, temporary, iteration of a scheme that seems to be in a constant state of being chopped and changed), the UK is crying out for a genuine counterpart to something like the USA’s Small Business Administration (SBA) loan scheme.

Chris St Cartmail, Business Sale Report Director, calls for immediate government action:

“Anyone suggesting that we have an equivalent facility in place already in the shape of the British Business Bank needs to understand the huge differences in both scale (number of loans + total funding totals), funding routes and eligibility criteria between the government-owned organisations.

Each year, the US SBA loan scheme provides over $35 billion in funding to around 60,000 individuals and businesses seeking to start up businesses, invest in their companies and grow through acquisitions.

The British Business Bank wrote a total of £1.6bn in funding agreements in the 2022/2023 year, 99 per cent of which was deployed outside the ‘Big Five’ banks. Its entire stock of funding support sat at around £12.6 billion.

Scaling ambitions for private businesses in the UK are stifled to a large degree by two major areas. One, access to capital and a poor funding ecosystem. Two, inadequate tax incentives, high tax rates and complex tax regulations.”

SBA loans are available up to a maximum of $5 million, with the government guaranteeing 85 per cent of loans up to $150,000 for banks and 75 per cent for larger sums. While thousands of loans are given out each year, the default rate remains relatively low and the scheme is broadly considered an unequivocal success.

The next government, then, has the opportunity to institute a permanent equivalent of the SBA scheme that can provide the sort of ready access to financing that would enable SMEs to grow. With SME confidence low and the faith of small business owners in their ability to access funding rapidly diminishing, such a move would be immensely popular with the many SME owners across the UK.

This isn’t about charity though. Having a strong SME population comprised of ambitious, growing companies that are empowered to fulfil their potential would be hugely beneficial to the UK economy, driving growth, innovation and employment across the country and helping the UK to finally kick on following the long malaise that has come with Brexit, COVID-19 and the recent economic downturn.

What is the SBA scheme?

An SBA loan is a type of loan partially guaranteed by the US Small Business Administration (SBA). These loans are provided by participating lenders, including banks and credit unions, but the SBA reduces the risk posed to the lender by guaranteeing a portion of the loan. This arrangement helps small businesses qualify for loans with favourable terms that they might not be able to secure through conventional lending channels.

There are four main types of SBA loans:
1. 7(a) Loan Program: The most popular SBA loan, it can be used for a variety of purposes including working capital, mergers and acquisitions, debt refinancing, and purchasing real estate or equipment. The maximum loan amount is $5 million.

2. 504 Loan Program: This program provides long-term, fixed-rate financing for major assets such as real estate or equipment. It’s designed to promote business growth and job creation. These loans involve a private lender, a certified development company (CDC), and a borrower.

3. Microloan Program: These loans offer small amounts of financing, up to $50,000, for startups or small businesses to purchase equipment, inventory, or supplies, or to use as working capital. Microloans are typically provided by nonprofit community-based organisations.

4. Disaster Loans: These loans are available to businesses, homeowners, and renters to repair or replace property and assets that have been damaged or destroyed in a declared disaster, including physical damage and economic injury loans.

SBA loans often offer lower down payments, competitive terms, and easier qualification criteria compared to other types of business loans, making them an attractive option for small business owners.

SBA loans for M&A
In addition to the help that the SBA loan programme offers in terms of working capital, economic development and disaster recovery, they are also (specifically the SBA 7(a) Loan Program) a popular option for financing M&A activity.

The SBA 7(a) loan can be used to buy an existing business. This includes buying a competitor, expanding an existing business, or purchasing a franchise. SBA 7(a) loans can also finance the acquisition of intangible assets such as goodwill - often a significant component of M&A deals.

Furthermore, 7(a) loans can be used to finance acquisitions of commercial real estate or equipment, including under the same loan if these acquisitions form part of a wider company acquisition.

SBA loans can also be used as part of a structured deal involving other types of financing, such as seller or bank financing, potentially helping to provide additional support in larger acquisitions and giving buyers greater flexibility in how they finance, structure and execute a transaction.

The utility of SBA loans for M&A purposes can also extend beyond the deal itself, with loans also able to cover working capital requirements that may arise during the deal or in the post-acquisition integration phase.

Benefits of Using SBA Loans in M&A
There are a number of key benefits that SBA loans can offer business owners engaging in M&A activity. Perhaps the most important upside is the lower equity investment that SBA loans require in comparison to conventional M&A financing sources.

SBA loans will also typically offer longer repayment terms than more traditional bank loans, which can be of huge benefit to buyers in improving cash-flow during the important, and often risky, post-acquisition period.

Additionally, they will typically offer more competitive, more affordable interest rates than bank loans, meaning that buyers are not burdened with higher repayment costs and are able to divert more cash to growth.

Finally, one of the core benefits provided by an SBA loan is that they are both comprehensive and flexible, covering a wide range of different needs and requirements that might arise during an M&A transaction, from purchasing the business to funding working capital.

The UK’s limited equivalents
Over the years, there have been several UK government-backed loan schemes that provided similar funding opportunities to the SBA loan scheme – however, options have dwindled over recent years and there is currently not really any direct equivalent that UK businesses can use to access growth capital and funding for acquisitive expansion.

The clearest parallel is the new Growth Guarantee Scheme, the latest iteration of the Recovery Loan Scheme (which ended on June 30 2024). The Recovery Loan Scheme itself followed the Coronavirus Business Interruption Loan Scheme (CBILS) and the Enterprise Finance Guarantee.

The Growth Guarantee Scheme is scheduled to run for a further two years and the terms will remain unchanged from the previous scheme, providing a 70 per cent guarantee to participating lenders on finance up to £2 million offered to smaller businesses. The government expects the initiative to support 11,000 businesses between July 1, 2024, and March 31, 2026.

The first two iterations of the Recovery Loan Scheme, designed to support access to finance and growth for UK businesses recovering from the COVID-19 pandemic, enabled £4.3 billion of finance to smaller UK businesses.

The scale of financing, extent of the government guarantee and limited timeframe means that there is no permanent scheme in place to provide UK SMEs with the same level of support as SBA loans, which provide up to $5 million – approximately £3.9 million – come with a higher guarantee from the government and form a permanent scheme.

For small business owners already facing a limited number of other options for attaining finance, the temporary nature of the government-backed schemes and the fact they are frequently being changed may lead to the feeling that there is a lack of commitment on the part of the government to invest in their success.

At a time when achieving organic growth and attracting investment can be incredibly difficult for UK SMEs and can seriously harm their growth prospects, a permanent, government-backed loan scheme could provide UK SMEs with the readily available funding they need to attain acquisitive growth and invest in the tech and assets that can help to drive organic expansion.

The incoming government, then, has the opportunity to establish a bold new policy that sets it apart from its predecessors and comprehensively demonstrates that it is an administration with a long-term commitment to providing small and medium-sized businesses with the right conditions and means to achieve their potential.

The extension of the Recovery Loan Scheme was broadly welcomed by the UK’s small business community when it was announced at the 2024 spring budget, but some were quick to point out that the incumbent Tory government was potentially seeking to curry pre-election favour with a business community that has increasingly been moving towards Labour.

Overall, the response from small business leaders to the spring budget was mixed. Bibby Financial Services CFO Theo Chatha said that, despite relief at the extension of the Recovery Loan Scheme, “more needs to be done to support UK SMEs to grow and thrive amid a tough credit environment.”

Chatha continued by urging policy makers and the British Business Bank to “reinvigorate” the Bank Referral Scheme, in order to direct small business owners to alternative funding providers. He added that, with economic forecasts indicating signs of improvement, providing access to “a wider array of financing options for SMEs must be at the heart” of returning the UK to sustainable growth.

FundOnion CEO James Robson, meanwhile, was more scathing, saying that business leaders would “feel left out in the cold” by the measures announced in the budget and that SMEs require “greater access to alternative finance for quicker and easier funding”.

Robson added: “The ‘small gestures’ that were tabled are not enough to make a difference in the short term, let alone the long term. This was certainly a wasted opportunity to keep businesses on side, especially at a time when their heads are being turned by Labour in the run up to the election.”

Labour’s huge lead in the polls just days ahead of the election suggest that such efforts have largely been in vain, with the confidence of business owners in the Conservative Party’s commitment and capability to support them seemingly at an all-time low.

Should the Conservatives upset the odds, however, then announcing the introduction of an improved scheme to provide capital to SMEs would emphatically demonstrate their commitment and be a huge step to getting the business community back onside.

For a new Labour government, meanwhile, this kind of measure would likely eliminate any lingering doubts that business owners may have historically held about the party and enable the new government to start its tenure with something that would immediately instil confidence and bolster their approval rating during the key early days.

In addition to the Growth Guarantee Scheme, the British Business Bank (the state-owned development bank established by the government in 2014) also has a number of other schemes aimed at helping small businesses - although their scope is somewhat limited.

The Start Up Loans scheme, which pre-dates the BBB having been established in 2012, has provided over £1 billion in government-backed loans to small businesses since its introduction.

However, the scheme only offers sums of up to £25,000, with the average loan amount (according to the BBB) being just £7,200. This means that, while undoubtedly a valuable source of funds for budding entrepreneurs, the fund is of little use beyond providing early-stage funding to new small and micro businesses.

The Bank Referral Scheme, meanwhile, connects small business owners who are struggling to access financing with referrals to alternative lenders. While this could be a valuable resource for owners struggling to access traditional forms of financing, the scheme has come in for criticism over the fact that it is little used - see, for example, Theo Chatha’s comment (above) asserting that the government needs to “reinvigorate” the scheme in order to help more owners access financing.

The issues with these schemes are indicative of broader problems facing the British Business Bank and questions over its ability to genuinely help UK SME owners. In the year to the end of March 2023, the BBB fell to a pre-tax loss of £147 million, which it attributed to the challenging economy leading to a drop in the valuation of firms it has invested in.

Heading into the general election, there is uncertainty about the role of the BBB and the potential that significant changes could be made by a new government. In December 2022, a review commissioned by Labour shadow chancellor Rachel Reeves (likely the UK’s next chancellor) recommended that the BBB’s operational independence should be reviewed in order to stimulate investment in high-growth businesses. The report recommended that a Labour government should explore the lender’s mandate and ability to leverage external funding.

Last month, there were renewed calls for the BBB to be more independent in order to properly serve UK SMEs. A report from the Private Business Commission said that the current system, in which the BBB is overseen by the government, hampers its ability to effectively distribute funding.

The report stated that BBB investments were overly influenced by “the political priorities of whoever is in Downing Street, rather than necessarily allowing it to provide funding in the best way possible”, and that the requirement for annual government reviews meant that any long-term strategy was undermined and limited to electoral cycles.

Chile – Driving economic stability through SMEs

A similar scheme to the SBA loans programme is Chile’s FOGAPE (Fondo de Garantía para Pequeños Empresarios) - a government-backed guarantee fund designed to facilitate access to credit for SMEs.

Established in 1980 and administered by state-owned bank BancoEstado, FOGAPE schemes have provided support to thousands of businesses since their introduction, helping to drive growth as well as assisting companies in navigating economic shocks, such as the COVID-19 pandemic.

Following a 6.1 per cent contraction in the Chilean economy in 2020 as a result of the pandemic, three new FOGAPE guarantee programmes were launched, collectively running from April 2020 to December 2023.

During 2020, the COVID programme issued a record 274,150 guarantees and the various schemes have continued to drive the country’s recovery from the pandemic. In 2023, FOGAPE issued 257,400 guarantees as the country battled the impact of global economic contraction, with a reported US$6 billion in loans backed by the programme.

As with SBA, FOGAPE provides guarantees to banks and other financial institutions to cover a significant portion of SME loans in case the borrower defaults. Providing lenders with a higher degree of confidence in facilitating loans for SMEs that might otherwise struggle to secure financing.

By reducing lender risk and increasing the availability of credit for SMEs, FOGAPE aims to promote economic growth and job creation - part of broader efforts to promote economic growth and stability in Chile by fostering the development and competitiveness of small businesses and building a more dynamic and resilient economy.

The focus of FOGAPE is firmly on providing financial support to businesses that might otherwise struggle to access it, in order to generate wider economic stability, and the loans can in some instances be used to finance M&A deals that support a business’ growth and stability.

The businesses involved in the M&A transaction must meet the eligibility criteria set by FOGAPE - being classified as an SME according to Chilean standards and having a viable business plan that demonstrates the benefits of M&A for business growth and sustainability.

The M&A transaction should be aimed at enhancing the competitiveness, productivity, or operational capacity of the involved businesses. Fundamentally, the deal should strategically align with FOGAPE’s primary goal of promoting economic growth and stability and fit within the framework of its mission to support SMEs. The transaction should ideally result in stronger, more competitive entities that can contribute positively to the economy.

While the provision of a state-backed guarantee encourages lenders, financial institutions that participate in the FOGAPE scheme will of course still assess the proposed M&A transaction as part of their loan approval process. They will evaluate the business plan, financial health of the businesses involved and assess the expected outcomes of the M&A.

Lack of trust in banks encapsulates crisis
In a report earlier this year, the Treasury committee stated that the growth and innovation prospects of small firms were being severely damaged by unfair banking practices and financial regulators, with these issues compounded by a lack of supportive policies.

MPs involved in the report cited the use of personal guarantees (in which borrowers often have to put up their homes as collateral), “debanking” and “substandard processes” for resolving disputes between SMEs and their banks as being especially harmful.

Debanking, in particular, is a growing concern. This occurs when a bank closes a customers’ account, typically citing concerns around financial crime, an inability to complete adequate customer due diligence or the fact that the account is dormant.

While these are, of course, very real problems, the report noted that small business bank accounts are often closed without adequate explanation and revealed that 140,000 SME accounts had been closed during 2023 alone.

Combined with the ongoing reticence of banks to provide financing for SMEs against an uncertain economic backdrop, these issues have contributed to a significant lack of confidence among SMEs in their ability to access financing or be accepted for business credit that they need for their growth strategies.

The report noted that this “difficult small business environment is disincentivising risk-taking, innovation and, potentially, growth”.

The committee’s chair, Conservative MP Harriett Baldwin, commented: “There’s no hiding from the fact smaller firms have had a torrid time over the last few years.”

“Unfortunately, what we have found over the course of the inquiry is that there are some instances where banks and regulators are making a tough world for small businesses needlessly tougher.”

“Banks and regulators can’t wave a magic wand and solve all of the problems facing small businesses in this country, but they can certainly do more than they currently are. I hope banks, the regulators and the Treasury take careful note of what we’ve uncovered.”

The extension of what is now the Growth Guarantee Scheme has seemingly done little to assuage these concerns, indicating that – despite the government’s proclamations over how many businesses it has helped and will help over the coming two years – there is little confidence among SMEs that it can adequately bolster their access to financing.

In the current environment, it seems somewhat farcical that 2024 is being billed as “the year of the SME”. However, a general election and the likelihood of a new government can provide a clean slate and the opportunity for policymakers to deliver on this name.

With SMEs comprising the vast majority of UK businesses and being the engine of the country’s economy, it is high time for the government to introduce an ambitious, permanent scheme to provide small businesses with access to the financing they need to grow, achieve their potential and drive a sustainable economic recovery for the whole country.

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