Under-served and self-employed: The challenges faced by SMEs

TotallyMoney, and PwC’s whitepaper, 'Overlooked and financially under-served', found there to be an estimated 20.2 million UK adults who are unable to access mainstream credit, having grown 50% from 13.6m, when research was last conducted in 2016.

Our findings highlight that 58% of the 4m adults in alternative employment are defined as financially under-served, relative to 37% of the overall population. This is backed up by separate analysis from Cashplus Bank, which found there to be an unfulfilled demand for small and medium-sized enterprises’ (SME) credit of up to £6 billion. In addition to this, a massive 65% of new businesses are refused credit*.

Often subject to irregular income and outgoings, access to credit facilities can provide SMEs with much-needed breathing space, helping with cash flow. 2021 saw the number of sole proprietorships in the UK decrease by 11% (382,000) — with inflation continuing to rise and a potential recession on the horizon, we could see this trend continue into 2022.

Our research highlights that individuals who identify as self-employed, sole trader, freelancer, or contractor have an average gross personal income of £25k per annum, compared to £37k per annum for those in full time employment.

Lower, and less predictable forms of income, alongside a lower level of job security and the possibility of leave without sick pay, means self-employed customers are generally looked upon less favourably by lenders. Currently, as a general rule, only SME specialist lenders and digital challenger banks are willing to make the additional steps required to effectively underwrite sole traders. That means there’s a lack of options available for this group, with research from Cashplus Bank showing that 64% of sole traders do not have a credit card.

Secondly, self-employed individuals seeking to borrow less than £25K for their business will fall under consumer credit regulations. With 83% of self-employed, sole traders, freelancers and contractors subject to these rules, this makes funding their small business a greater challenge, unless they resort to using their personal credit facilities.

As there is little information for banks to base their decisions on, when making lending decisions for those in alternative employment, the borrower’s personal credit profile is often used instead. Sole traders aren’t registered with Companies House, and so with less information available, lenders can find it difficult to assess their credit worthiness.

Consequently, the borrower’s credit profile is used, which doesn’t give a true view of the business borrowing the money. As there is no established credit score or report that can help lenders conduct assessments on new/micro businesses, there is a significant gap preventing sole traders from accessing the same funding as limited companies.

Finally, there is less access to choice for sole traders in the market. This means they're less likely to get the most competitive deal and may face more expensive options as a result. In general, high-street banks don’t allow non-customers to apply for business credit cards. As a result, 75% of small businesses consider only one financial services provider (typically their personal bank account provider) when seeking credit. 

In our next blog we’ll share how we think this should be addressed.

*Third party consultancy research commissioned by Cashplus Bank (2021)

** Gov.uk