Research and Published by Mark Stephens
Commissioned by Growth Finance
Executive Summary
Despite government initiatives and a thriving fintech ecosystem, access to finance remains a persistent barrier for UK SMEs. This paper explores the underlying causes of what is increasingly referred to as the “trust gap”—the disconnection between how lenders assess risk and how SMEs present their funding cases. We draw on recent institutional reports, peer-reviewed academic literature, and real-world case studies to evaluate the problem and recommend actionable solutions.
1. Introduction: The SME Trust Gap
Small and medium-sized enterprises (SMEs) are the backbone of the UK economy, contributing over 50% of private sector turnover and employing 61% of the workforce (FSB, 2023). Yet, SMEs consistently cite access to finance as a leading growth constraint (British Business Bank [BBB], 2023).
This paper
2. Core Reasons Lenders Say No
2.1 Credit Scoring Models
Lenders often use automated credit scoring systems that rely on historic financial data. For early-stage or high-growth SMEs with limited track records, this presents an inherent disadvantage (OECD, 2022).
2.2 Documentation and Financial Transparency
Incomplete or inconsistent documentation remains a primary reason for rejection (UK Finance, 2023). Many SMEs lack formal business plans, up-to-date management accounts, or financial forecasting—key elements in a lender’s due diligence process.
2.3 Sector Exposure and Risk Appetite
Post-COVID, many lenders adjusted their risk appetites, leading to reduced exposure in sectors like hospitality, logistics, and retail. SMEs in these verticals face structural disadvantage regardless of individual merit (FCA, 2022).
2.4 Misalignment of Funding Products
SMEs often apply for inappropriate finance types—e.g., long-term debt for short-term cash flow gaps—which results in lender rejection (Bank of England, 2023).
3. Opposing Viewpoints: SMEs vs Lenders
SME Perspective
- “We’re growing, but banks don’t understand our business model.”
- “They said no with little explanation—how can we improve?”
Lender Perspective
- “They lacked sufficient documentation and clear repayment strategy.”
- “Their projections weren’t credible or supported by evidence.”
This divergence reflects more than just data gaps—it highlights a communication gulf and a fundamental misalignment in evaluating risk and readiness (OECD, 2022).
4. Case Studies: Fixing the Gap with Restructured Proposals
Case 1: Agri-Products Importer (Tradepulse Ltd)
Initial Status: Rejected by two high-street banks citing “cash flow volatility.” Action: Growth Finance restructured the case with a rolling 12-month forecast and seasonal sales mapping. Outcome: Approved for invoice discounting facility with a specialist trade lender.
Case 2: Pharma Scale-up (Celix Pharma Ltd)
Initial Status: Turned down due to rapid year-on-year growth and limited collateral. Action: Recast application to highlight R&D tax credits, intellectual property value, and executive bios. Outcome: Secured £1 million facility from a relationship-driven commercial lender.
5. Summary: Where the Disconnect Lies
| Area | SME Gap | Lender Gap |
| Language | Overly simplified narratives | Excessive reliance on jargon and ratios |
| Documentation | Incomplete forecasts and financial history | Lack of contextual engagement |
| Risk Framing | Optimism bias | Conservatism, especially post-crisis |
| Sector Knowledge | Assumes lenders understand industry nuances | Standardised sectoral de-risking |
Both sides suffer from institutional blind spots. While lenders protect capital, SMEs are focused on opportunity. Bridging this requires a shared language and better education on both sides.
6. Open Questions & Research Gaps
- How can AI be leveraged to personalise SME credit scoring without amplifying bias?
- What regulatory adjustments could encourage lenders to adopt broader risk metrics?
- Could industry bodies play a stronger role in educating SMEs on finance-readiness?
- How might fintechs and traditional lenders collaborate to de-risk underserved sectors?
Further research should explore dynamic financial modelling, trust-building metrics, and comparative cross-country studies on SME-lender engagement models.
7. Practical Tips: Preparing for Funding Success
- Align funding type with business needs and lifecycle.
- Prepare a lender-friendly business plan (include risks, not just strengths).
- Present clear cash flow forecasts and historical performance.
- Frame your sector positively using third-party validation.
- Seek pre-submission reviews from financial advisors or ex-lenders.
References (APA 7 Style)
Bank of England. (2023). Trends in Lending Q2 2023. https://www.bankofengland.co.uk
British Business Bank. (2023). Small Business Finance Markets Report 2023. https://www.british-business-bank.co.uk
Federation of Small Businesses. (2023). FSB Small Business Index Q1 2023. https://www.fsb.org.uk
Financial Conduct Authority. (2022). The changing shape of SME lending. https://www.fca.org.uk
Organisation for Economic Co-operation and Development. (2022). Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard. https://www.oecd.org
UK Finance. (2023). Business Finance Review Q1 2023. https://www.ukfinance.org.uk
Prepared by: Principle Researcher, Mark Stephens
Date: June 2025
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