There is an ongoing and heated debate in the UK about the importance of small and medium-sized enterprises (SMEs) for economic recovery, and the willingness of traditional banks to lend to them. Despite repeated efforts by policymakers to stimulate this lending, it has not been forthcoming, and this, so the argument runs, is holding back growth.

This report, the first from Demos Finance, the new financial services research unit at Demos, uses new analysis of the sector to explore this question, and explode some myths. It finds that most SMEs do not wish to borrow from a bank and of those that do, 90 per cent have no problems getting the financing they want. Equally, the majority are not significant contributors to economic growth, despite the crucial role they play as existing employers, customers and suppliers.

The report therefore argues for two fundamentally changed assumptions. First, rather than thinking small, we should think growth, focusing our efforts on those businesses with the will and potential to deliver growth regardless of size. Second, to target the parts of the economy where growth is achievable, we may need to look beyond bank lending and devise a funding environment able to support the risks associated with innovation and start-ups. Such an approach would help to ensure that those businesses with the capacity to grow receive the funding they need, paving the way for economic recovery.