MDX research discovers that larger SMEs wanting to reduce their environmental impact are more likely to attract finance for projects 

Millions of Small and Medium-sized Enterprises (SMEs) could be missing out on vital bank and non-bank debt finance which they desperately need to make a ‘green transition’ and become more environmentally friendly businesses, according to a new report from Middlesex University.

The research found that a two-tier system means larger and better resourced SMEs are more likely to secure traditional high street bank debt finance and supporting government green grants and subsidies.

According to the study, the vast majority of smaller SMEs lack support and access to external finance for projects to reduce their environmental impact by using electric vehicles, retrofitting buildings and installing renewable energy products such as heat pumps or solar panels. In the UK, there are more than £5.45 million SMEs, which have up to 250 employees, and this figure includes some 1.16m micro employers, with between one to nine staff members.

MDX academics from the GreenFin Research Cluster - Sylvia Gottschalk, Robyn Owen and Isco Coban - carried out in depth interviews with providers of bank and alternative non-bank debt finance including major high street banks, with a focus on London and the South East contrasted with the rural South West. Researchers discovered property ownership including premises and personal housing was often crucial to securing loans, but most SMEs rent their properties. In addition, they found that funders tend to favour larger loans above £250,000 and that high-street banks tend to only have relationship banking with firms that have a turnover above £1 million. SMEs often have to apply online and increasingly rely on brokers who can be unregulated and add to their existing costs.

Robyn Owen, Professor of Entrepreneurship and Sustainable Finance, Deputy Director of the Centre for Enterprise, Environment and Development Research (CEEDR), said: “Our study shows SMEs which want to reduce their impact on the environment are missing out on vital funding because banks and other providers favour larger businesses with more resources. This two-tier funding systems must surely be addressed if the government is serious about building a low carbon, green growth economy.”

Recommendations in the report for finance support policy include:

• Establish a national, or sub-regional (Combined Authority) scale overarching authority, such as an expanded role for the Mayor of London’s Energy Efficiency Fund to act as a one-stop-shop agency to manage the scale-up of grant and subsidies for SME commercial energy and environmental work to meet net zero, circular economy and biodiversity requirements.
• Provide national and local sub regional (Combined Authority) SME green finance roadmaps which can be accessed online. These could link to accredited Financial Conduct Authority regulated finance brokers for independent guidance, facilitating improved SME access to non-bank finance opportunities.
• Provide a well-publicised national or local sub regional (Combined Authority) targeted grant funding programme.
• Consider allowing Local Authorities to utilise ‘Green’ Business Rate exemption, such as piloted by Sutton Council, to fund local SMEs in their aims to become more environmentally friendly.
• Public policy should regulate Landlord requirements for tenanted commercial properties and make the uplift of commercial property Environmental Performance Certificates (EPCs) a priority.
• Introduce a Universal Payment System for retrofit to small employer SMEs (e.g. micro enterprise of 1-9 employees) of up to £10k. This would offer more efficient blanket financial coverage of smaller businesses and avoid the inefficiencies of the current drip-feed, bureaucratic grant schemes.

The project received additional funding from the Natural Environment Research Council (NERC) Integrating Finance and Biodiversity (IFB) programme and Centre for the Understanding of Sustainable Prosperity (CUSP).

Read the full report – Are English SMEs disadvantaged in accessing Green Finance? 

Photo by Markus Spiske on Unsplash