Evaluating Changes in Bank Lending to UK SMES Over 2001-12 – Ongoing Tight Credit?

Pub. Date
15 April, 2013
Pub. Type



The availability of bank finance to small and medium sized enterprises (SMEs) is important to allow SMEs to start up and finance investment for growth. There has been widespread comment regarding the continued difficulty SMEs perceive in obtaining external finance since the financial crisis of 2008. This followed a period in which credit was more widely available in the early to mid 2000s.

BIS commissioned this project to develop an understanding of the changes in lending to SMEs from 2001-12; to identify the extent to which bank lending has contracted since 2008, and to identify whether SMEs were disproportionately affected in their ability to access finance. An important focus of the research was also to identify SME characteristics associated with greater difficulties in accessing finance.


The project used data from a series of SME surveys that provide detailed information on the characteristics of a sample of UK SMEs, their owners and experiences of obtaining finance[1]. Using econometric models, which included controls for SME characteristics and risk factors, indicators of changes in the supply of bank lending over the time period abstracting from borrower risk could be obtained. 

Key findings

SMEs have faced a more challenging environment for accessing credit after the financial crisis of 2008 and subsequent recession.

Even controlling for risk factors, rejection rates for both overdrafts and term loans were significantly higher in the period from 2008-9 onwards, which is indicative of constraints to the supply of credit. The evidence suggests greater credit restrictions for term loans than overdrafts. Firm characteristics associated with greater likelihood of rejection included higher credit risk rating, previous financial delinquency and lower sales levels, whilst older more established businesses were less likely to be rejected.

Margins for both overdrafts and term loans were also significantly higher in the period from 2008-9 onwards, even controlling for risk, as cuts in the Bank of England base rate were not fully transferred on to SME borrowers. However there was no significant increase over time in the likelihood of an SME with given risk characteristics having to provide collateral. Whilst arrangement fees were high during 2008-9, they subsequently returned to levels that were not significantly different from the period before 2008.

The tightening in credit since 2008-9 has disproportionately affected low and average risk SMEs (based on Dun and Bradstreet credit scores). However there was no significant change over this period in the likelihood of rejection for SMEs rated as above (e.g. greater than) average risk. This suggests banks viewed lending to the safer categories of SMEs as relatively more risky in the period after the financial crisis than they did before, although the pattern is also suggestive of a partial withdrawal from SME lending as an asset class. After 2009 there was also an increase in the proportion of SMEs rated as above average credit risk due to the effects of the recession on sales, profitability and asset prices.

Effects of ethnic origin of the owner on lending to SMEs were detected, with black entrepreneurs more likely to be refused credit. The newly-nationalised banks in 2008-9 were more willing to provide SME credit overall than were other institutions.

Time series modelling reveals that greater uncertainty in economic conditions appears to have had greater negative effect on lending to SMEs compared to the corporate sector as a whole. This suggests economic uncertainty as has prevailed since 2008-9 leads to a general shift away from higher risk SME lending towards lending to larger businesses.  

Overall, we suggest that the research is indicative of a shortage of finance for SMEs, reflecting banks’ attitudes to risk and their own pressures to delever combined with banks’ market power in the SME sector. Although demand is also probably subdued, there is a high level of discouragement from application for lending as well as high rejection rates and margins on credit after controlling for risk. If the situation is not resolved, output, investment and employment will be lower than would otherwise be the case, with adverse effects on economic performance in the short and longer term.


[1] Surveys include: Finance for Small and Medium-sized Enterprises 2004, UK Survey of Small and Medium-sized Enterprises’ Finances 2008, BIS SME Finance Survey 2009 and the SME Finance Monitor covering 2010-12.