Despite contributing £25bn annually to the UK economy, ethnic minority-led businesses (EMBs) continue to face systemic hurdles in accessing finance.
This is holding back the full potential of the UK’s SME sector as a whole. Before taking office, Labour’s then-shadow minister for women and equalities, Anneliese Dodds, warned that despite ethnic minorities making up 18% of the population, only 6% of SMEs were led by people from black, Asian, mixed, or other ethnic groups. The prediction was it would take until 2113 for ethnic minority representation in the UK’s SME sector to reflect the country’s diversity – with Labour then suggesting a series of measures that could rectify the historic lack of support for ethnic minority entrepreneurs.
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But the financial services sector doesn’t need to wait for government direction before it takes action. In 2023, the LSB published research on the challenges EMBs face in accessing finance, and identified a number of steps the sector should take in response. The report received the backing of groups like the All-Party Parliamentary Group for Ethnic Minority Businesses and was based on EMBs’ own experiences and insight from our oversight of financial services firms.
It served as a clarion call to firms to adopt a proactive and strategic approach to supporting the growth of EMBs. To ensure firms have the framework in place to increase access to finance for EMBs, we are now developing a first-of-its-kind inclusive lending Code to drive forwards the report’s recommendations and unlock the full potential of the UK’s EMBs.
Cultural and religious differences cannot be overlooked
Our 2023 research highlighted that many EMBs report a lack of understanding from financial services firms of the cultural and religious contexts in which they operate. For example, communities where physical cash is highly valued and seen as good to have available may give firms an unclear picture of a business’s finances when looking at a balance sheet or other overview of assets, which could in turn lead to a poor outcome for the customer.
The new Code will take into account that financial products and services should account for the diverse business models or financial practices of minority entrepreneurs.
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By GlobalDataBuilding trust in financial institutions
One of the challenges in boosting EMB access to finance is the perception – identified in the 2023 research – among some EMBs that the financial services sector isn’t ready to support their needs. For example, some of the EMB feedback featured in the report was that bank branch staff often lacked diversity even when branches are in a diverse area. Perceptions that the financial services sector is out of touch with EMBs could erode trust and confidence in the sector, resulting in disengagement from EMBs and a reluctance to even seek financing in the first place.
To build up trust, firms should ensure their recruitment practices are inclusive and their workplaces diverse. The value of lived experience cannot be overlooked here – engaging the services and guidance of those with lived experience, either through lived experience panels or representative organisations, can really turn the inclusive recruitment process around.
Firms should also ensure that any work focused on ethnic minority communities leads to better outcomes that can be measured, and the work that is being done and any successes that it achieves are communicated to customers.
Consider more nuanced business models and growth journeys
Ethnic minority businesses sometimes aim for different goals and growth trajectories compared to the broader business community. These differences can be misunderstood by firms, leading to misaligned criteria for loan approval. For instance, family-owned businesses, which are common among ethnic minority groups, may prioritise long-term investment and stability over rapid short-term growth, which may not align with conventional lending standards that emphasise quick returns and repayment schedules.
Our report highlighted that EMBs more frequently do not ‘tick the boxes’ of typical lending criteria, and, where loans were declined the decision was often explained away as “the system not allowing” it, with no further context. This resulted in the customer not understanding the reason for the declined application and becoming disillusioned with the financial institution in question. To ensure opportunities to support EMBs aren’t missed by lenders, the broader potential of the businesses they are assessing must be considered.
No barriers in accessing the basics
Even basic banking services can be a hurdle for many SMEs, let alone EMBs also navigating language and cultural barriers. Establishing a business bank account, accessing advisory services, or complex loan applications can all present challenges, with many entrepreneurs stating that information on available products is often difficult to find or understand – even where EMB support is available, it’s not always communicated effectively.
Our data shows that better advisory services are a top unmet need for EMBs. Improved signposting, clearer communication, and more transparent decision-making processes would go a long way toward building trust and ensuring that EMBs are better served. Crucially, having relationship managers with specialist training who understand the specific challenges faced by EMBs will help to bridge this gap.
A path forward with our new Code
RFI Global data on behalf of the LSB shows that two in five EMBs plan to take out lending products in the next 12 months, double the rate of other SMEs. There is strong appetite for borrowing within this group, and so now is the time for firms to lead the way in adequately supporting this demand, providing accessible and considered products and services for their EMB customers.
Our new Code, supported by industry leaders and policymakers, aims to drive real, practical change. This Code – set for introduction in early 2025 – will set a framework for how financial institutions engage with ethnic minority businesses, ensuring that these growth engines in our economy have access to vital financial services. By setting clear expectations and promoting inclusivity, the Code will help build trust between EMBs and the financial sector; customers should look for firms who commit to signing up to the Code when it is introduced, as they will be leading the way to fostering a more equitable business environment for all.
Emma Lovell is Chief Executive, the Lending Standards Board
