1.6m UK businesses ‘virtually invisible’ to financial system, data finds

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More than 1.6 million UK businesses can struggle to access growth funding or trade credit because there is insufficient information available about their financial track record, according to analysis from Experian.

This lack of credit information means these SMEs can be considered higher risk when it comes to lending.

These ‘SME Invisibles’ are either too new to file their first set of accounts, or only submit a balance sheet which doesn’t include profit and loss. As a result, they may struggle to access the growth funding needed to take their business to the next level, or even trade credit to buy products and materials.

Lisa Fretwell, Managing Director of Data Services at Experian, said: “More than 600,000 start-ups are created in the UK every year. The early years of trading are the most precarious, when directors are finding their feet, searching for new clients and often funding to keep their business moving forward.

“Accessing business loans and trade credit requires a strong credit history, but so many SMEs have not been trading long enough to create a footprint or be required to file full accounts. Experian has worked hard to almost halve the SME Invisible population through adding new data sources.

“Open Data solutions can help us to reduce it to zero by enabling businesses to contribute their own information, so they can thrive and contribute to our economy in even greater numbers.”

There are 4.4 million live incorporated businesses registered with Companies House, however 700,000 of these are not currently trading so have no requirement to access finance. Some 200,000 more businesses file full accounts which include profit and loss figures, so have ‘thick’ credit files with enough information for lenders to confidently make credit decisions.

Experian has taken this Invisible population of 3.5 million and reduced it to 1.6 million by adding new data sources. These sources include voluntary Credit Account Information Sharing (CAIS) and the Government’s mandatory Commercial Credit Data Sharing (CCDS) scheme, which covers Current Account Turnover (CATO) data as well as credit accounts.

Experian estimates around 300,000 SMEs that would previously have struggled to access credit due to lack of information will see their credit scores improve when this information is considered, to the extent they will no longer be perceived as high risk by lender.

Open Banking technology also provides small businesses with faster access to funding by eliminating much of the paperwork required to apply for finance. Experian’s Commercial Acumen platform allows SMEs share bank transaction and management account information with a lender within minutes. It also reduces the risk for lenders and the cost of serving SMEs. Experian is the first credit reference agency to add both Open Banking and management account data to its products.

By using these new data sources, lenders and trade credit providers can make a more accurate assessment of businesses seeking finance. It will help support a significant part of the UK economy, with SMEs producing a turnover of more than £2.2 trillion each year.