Small businesses that come up with new ideas are more likely than less innovative rivals to have problems securing lending, slowing the UK’s economic recovery, a survey revealed.
Firms that have introduced an entirely new product or process in the past year are more likely to be refused finance by banks, according to the study which polled more than 11,000 companies.
While access for all small and medium enterprises (SMEs) has worsened since the financial crisis, researchers behind the report argued their findings indicated a “systemic failure” that is holding back the UK economy through a lack of investment in the companies with the most potential to grow and create jobs.
Of those firms seeking finance between 2010 and 2012, around half reported difficulties in obtaining finance, roughly double the rates seen in 2007 to 2008, the study by the Big Innovation Centre, a think tank, found.
Within that group, however, innovative SMEs were significantly more likely to encounter problems than non-innovative small firms. Close to 38pc of the innovating firms that recently applied for finance failed to secure any. Of the non-innovating firms, 11.5pc failed.
Even before the financial crisis, investment in innovation was falling as a proportion of banks’ total capital, the report noted. Between 2001 and 2007, the capital raised by UK banks increased by £1.3 trillion, while investment in innovation rose by just £26bn.
The researchers said risky business models and a greater reliance on intangible assets was why such firms struggled to obtain finance. However, they argued that these SMEs have a disproportionate impact on the national economy, being the most likely to create new markets and achieve rapid growth.
As a result, they called for the Government to make more effort to back innovative SMEs, by increasing the scope and scale of the state Business Bank. They also suggested the politicians must support access to finance through lending other than via the banks, such as debt finance.
Dr Neil Lee, who co-authored the study, said: “A lack of finance for the firms which need it most will be a long-term drag on the UK economy. Without action from policymakers, banks are unlikely to change their lending behaviour.”