SMEs face consistently higher interest rates and tougher lending conditions, research shows.

SMEs faced consistently higher interest rates than large companies, as well as tougher lending conditions, new research has found. The study by the Organisation for Economic Cooperation and Development (OECD) shows that while average interest rates on SME loans fell between 2007 and 2010, the gap between the rates paid by small and large businesses grew.

Yet the data showed that for many small businesses, loans simply weren’t available. Bank lending to SMEs fell sharply in the recession, and though it picked up in 2010, in most countries it failed to regain its 2007 level.

Squeeze on SMEs

The OECD describes SMEs as "crucial engines of economic growth, jobs and social cohesion", but the report’s conclusion was stark: "Access to finance remains one of the biggest challenges in the creation, survival and growth of small firms."

The report blamed a combination of falling consumer demand and tighter credit conditions, both of which hit SMEs’ cash flow and liquidity hard, resulting in increased payment delays. Across the 18 countries surveyed, the squeeze on SMEs was made worse by a big drop in both venture and growth capital.

Available credit

Here in the UK, the debate over whether or not SMEs are getting the finance they need to grow has become one of the defining issues of the economic slowdown. Britain’s banks narrowly missed the targets for SME lending set for them under last year’s Project Merlin deal.

Last month the Bank of England’s quarterly Credit Conditions Survey revealed that the amount of credit made available to SMEs in the first quarter of 2012 was broadly the same as in the final three months of last year.

Alternative forms of finance

With traditional sources of credit and working capital often not available to them, many British SMEs are now seeking alternative forms of finance.

One increasingly popular solution is invoice trading, where companies keep on top of their cash flow by auctioning their invoices online. The technique allows companies to quickly access funds that would otherwise be tied up for months in invoices."

Christopher Shaw, CEO of the invoice trading auction service Platform Black, commented: "In a climate where banks are still either reluctant or unable to lend to SMEs, even successful companies can struggle to get access to working capital. This is prompting many to look at alternative sources like invoice trading. In the current environment, keeping on top of cash flow is essential."