Could a credit register revolutionise small business lending?

Norman Carson of Boost Capital believes that a credit register could ease access to cash.

Small firms are blighted by a lack of finance. But making larger lenders share information about businesses’ credit history could be an important step towards filling the funding gap.

So argues no less a figure than the Chief Economist of the Bank of England, Andy Haldane, a radical thinker for a central banker, and a powerful voice in the debate about how things might be done differently in the wake of the financial crisis. He recently made the case for the creation of an official credit register, which would record and share details of companies’ creditworthiness with all prospective lenders.

Eight out of ten SMEs in Britain still bank with the main four high street names, yet these banks rarely share their credit data, putting smaller providers at a distinct disadvantage. Haldane makes the point that small companies suffer as a result, with so-called challenger banks and new entrants less able to make informed funding decisions or to establish themselves as a strong and visible alternative for the small business community.

The idea of a centrally-held, easily accessible credit register is hardly a new one. Almost 100 countries worldwide have such a resource, and a large proportion of member states within the European Union already boast a central repository of credit information. So, why is the UK proving so slow to follow suit? Certainly, the evidence for credit data sharing is persuasive. Studies repeatedly find that commonly available company information eases credit conditions – put simply, greater transparency equates to more capital for companies.

Change is overdue

Change to the SME lending landscape is long overdue. The current banking system resembles an oil tanker, ploughing on ponderously, its slow progress all too often leaving small firms starved of investment and struggling to survive. The reality is that the financial behemoths are not evolving in line with the markets that they are meant to serve. Smaller businesses need more funding, of course, but they also want greater choice and flexibility in how they gain access to that finance.

This is one of the reasons why alternative lending has become more prominent in recent years. It is a trend that is being driven in no small part by SMEs themselves who have been left so bruised by the rejection they have faced from the regular banks that they have been forced to look elsewhere for help.

The irony is that they are prepared to innovate where the banks are not, increasingly turning to independent finance brokers to fulfil their capital needs. Firms are also supporting each other more using trade credit, and technological developments have seen the emergence of peer-to-peer platforms and other direct lenders.

This multiplicity of funding options is, of course, a good thing for small business owners. But all of these providers are operating with one hand tied behind their backs when coming up against the big banks, and they would be greatly helped by the level playing field that a credit register would create. And where lenders benefit, smaller firms benefit – from greater competition, improved credit availability, as well as better lending rates.

The Government needs to make a change

I realise that change is often a slow process, and policy frequently lags behind real shifts in the economy and in business behaviour. The Government is already making efforts to improve information sharing through proposals to force the big banks to share company data with rivals via credit reference agencies.

There’s been talk of major banks being forced to offer up alternatives when SMEs have been rejected for credit, and this is surely a step in the right direction, But the gap in funding for large and small firms remains so great, and the balance of power between established banks and newer, smaller lenders so skewed that one cannot help but feel that more must be done.

Haldane has called the small business lending market an ugly duckling, neglected and unloved by major banks that instead lavish attention on bigger customers and less seemingly risky lending. The introduction of a credit register would allow those providers that recognise the swan-like potential in Britain’s smaller enterprises to provide the help that SMEs so desperately crave. We know that small firms’ pressing need for capital to flourish, to create jobs, and to achieve growth is no fairytale. But it is a message that policy makers must heed and act upon if they truly believe in happy endings.

Norman Carson is Director of Business Development for Boost Capital.

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