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Sector’s GDP contribution drops due to lack of funding

By Melodie Michel , 30-Jul-2014

The hospitality sector's contribution to the UK's GDP has dropped by 0.2 per cent

The hospitality sector's contribution to the UK's GDP has dropped by 0.2 per cent

The hospitality sector’s contribution to Britain’s GDP dropped 0.2 per cent (£1.5bn) between 2007 and 2013, partly due to the lack of bank funding for SMEs, according to a report by Boost Capital.

The research revealed that SME-dominated sectors such as retail, construction and hospitality saw a stronger decline than other industries in GDP contribution since pre-recession times.

The alternative finance firm believes this is the result of a drop in SME lending from banks, down 6 per cent or £2.6bn between 2008 and 2012. 

Marc Glazer, CEO of Boost Capital, said: “The real contribution and value to the nation’s economy from SMEs should never be understated. Big sectors dominated by SMEs, like hospitality and construction, have shown comparatively lower growth than other sectors. If funding for these businesses continues to be constrained, their growth and ultimate contribution to Britain’s bottom line may fall far below its potential.

“The stunted growth, often in sectors with large numbers of SMEs, could be caused by numerous reasons given the incredibly bumpy ride for the UK economy in the last seven years. Mostly, from what we have seen on the ground at Boost Capital, SMEs are still not being given the financial footpaths to grow.”

Size matters

The firm also refers to the government’s 'Evaluating changes in bank lending to UK SMEs over 2001-2012 – ongoing tight credit?' report from April 2013, which showed that size was a significant factor in whether or not a loan or overdraft application gets approved.

As a consequence, a growing number of SMEs don’t even try to apply as they don’t believe they will meet banks’ requirements. 

Boost Capital took the example of the US to predict how the situation will evolve in the UK: “In the US, we’ve witnessed a double impact since starting out as an alternative lender. On the one hand, the percentage of small business loans in bank portfolios has dropped from 51 per cent in 1998 to 36 per cent in 2008 and even lower to 29 per cent in 2012. On the other, 18 per cent of SMEs did not even attempt to apply as they did not believe they would be approved.

“In the UK, we’ve seen very similar trends in funding supply and demand since our launch in 2012. But, we have also seen some very encouraging signs from the government to tackle this impact as they push towards a referral system. Businesses declined by traditional lenders can seek an alternative option which may suit their needs better in the long run,” Glazer added.

Banks under fire

Banks are now facing the threat of a full inquiry by the Competition and Markets Authority , which deemed the services and value provided by the banking sector to SMEs as not competitive enough.

The watchdog’s report stated that the ‘big four’ high street banks (RBS, Lloyds, Barclays and HSBC) account for 85 per cent of the country’s business current accounts, and therefore have very little incentive to compete on price and services.

Alternative funding

Companies like Boost Capital or Liberis have helped plug the funding gap by providing quick-to-access finance to the hospitality and other SME-led sectors. They usually work on a profits-based repayment model to avoid putting financial strain on cash flow.

Restaurants have also been using crowdfunding as a way to get financing from their engaged customers, with resounding success.

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