Discouragement Project

This project  ran between October 2013 and March 2014, was commissioned by BIS and the ESRC was completed by Dr Stuart Fraser, Associate Professor at Warwick Business School. The project explored wider commentary on issues of discouragement. The Final report ‘Back to Borrowing?‘ features further insight and analysis into the reasons for discouragement and how businesses can be encouraged to apply for lending, as well as details of in-depth interviews with discouraged borrowers.

This research sheds more light on ‘discouraged borrowers’, a previously under-explored group of SMEs, who choose not to seek bank finance because they believe they will be unsuccessful. The Report identifies a group of around  173,000 small business which are discouraged borrowers (about 4% of all firms) and advocates six steps that banks, Government and others should take to encourage an extra 123,000 of these SMEs to apply for bank finance – two thirds of which the ERC estimates could be successful.

The research found that the basis for discouragement is often the refusal of a loan or overdraft application in the past. However, insights from case studies of small firms indicated that it is as much the way the refusal is delivered that discourages borrowers as the refusal itself. The research also found that media coverage of bank lending appears to have had relatively little impact on perceptions that applications will be successful.

Dr Stuart Fraser said:

“Our research raises a number of questions for banks, not least how important positive banking relationships are, and we’ve heard high street lenders commit to improving the quality of their service to SMEs, which is a positive development. But we think there are a number of other steps that could be taken to ensure smaller borrowers are sufficiently informed of the process, their rights, and the support that exists for them.”

Based on the findings of the research, the report recommends six measures for banks, Government and business support bodies to take that would help tackle the underlying issues that lead to discouraged borrower concerns:

  • Banks should ensure the Lending Code/Principles are implemented more consistently and effectively.
  • Banks, the British Business Bank (BBA)and business support groups should raise awareness of the Lending Code/Principles among borrowers.
  • Banks, the BBA and business support groups should raise awareness of the Appeals Process among borrowers.
  • The BBA, assisted by banks, credit reference agencies, business support groups and alternative finance providers should form a working group to explore how they can either enhance business awareness of their credit health and the steps they need to take to improve it or help businesses find alternative providers of finance where this is more appropriate.
  • The BBA and business support groups should raise awareness/take-up of support from the Start-Up Loans Company among borrowers.
  • The BBA and business support groups should raise awareness/take-up of the Enterprise Finance Guarantee Scheme among borrowers.