But with many expecting high street banks to lend to small firms, why should the public sector intervene in this market place?
Over the last six years, lending to SMEs has fallen as various restrictions have been imposed on, and developed by, the banking sector in the UK in response to the 2008 financial crisis and its aftermath.
Whilst the UK economy has recovered during the last three years, numerous reports show that bank lending has not kept pace with the growing economy. Similar to other studies on funding SMEs, the Welsh Government’s access to finance review has detailed the continuing decline in bank lending to businesses in Wales.
For example, data on bank lending to SMEs from 2011-2014 shows that the overall value of bank facilities approved in Wales has fallen by £1.1 billion since 2011, with loans accounting for 84 per cent of that decline.
The lack of funding available from the financial sector for small and medium-sized enterprises (SMEs) is known as the "funding gap". This occurs when the private sector funders are unwilling to accept certain risks that they deem too high in lending to small firms.
This can result in businesses with viable projects being refused access to external finance and in such circumstances, government intervention to address any under-investment or market failure is required.
However, the role of government should not be focused only on providing money to fill any funding gap. Instead, it should be working together with private sector to help SMEs through a targeted involvement of public intervention within the market gap that is carefully identified and evaluated.
Therefore, part of the role of any future solution by the Welsh Government would be to address the funding gap in the market-place i.e. the difference between the funding required by SMEs and the funding available from the private sector.
But what is this funding gap in Wales?
Various reports have estimated the funding gap for the UK from which the level in Wales can be extrapolated. For example, the accountancy group Deloitte’s analysed long-run survey data of SMEs in 2012 in preparation for the British Business Bank and estimated there to be a gap in the provision of finance to UK SMEs of around £5 billion but that by the end of 2017, this figure could rise to about £22 billion. Assuming that this is proportionately applied to Welsh SMEs, the funding gap would have been about £200 million in 2012, £500 million in 2015 but would rise to around £800 million by 2017.
Similar research undertaken for the Task and Finish Group also estimated this funding gap to be approximately £500 million last year.
Therefore, the question is whether other sources of existing funding from the private and public sector can fill this gap?
According to the British Business Bank that supplies UK Government support to Wales, its various programmes supplied £28 million of support to Wales in 2013-14. In addition, Finance Wales provided £33 million of investments in 2013-14 with a further £2.3 million facilitated by xénos, the Wales Business Angel Network.Whilst some have suggested that the alternative finance market such as crowdfunding could fill this gap, best estimates of the current impact of this new and growing sector shows that only around £44 million of this type of funding is currently coming into Welsh SMEs.
This leaves 80 per cent of the funding gap remaining (£400 million) to be filled either by the high street banks or by sources of public funding. Indeed, a study commissioned by the Task and Finish Group revealed that SMEs in Wales have a higher probability of being rejected for both overdrafts and bank loans as compared to those in England and Scotland.
Also, Welsh SMEs that were offered smaller amounts of funding than they applied for are more likely to be offered an amount more than 50 per cent lower than requested. This failure in the market place suggest there could be a role for government in working with the banks to close this funding gap for SMEs in Wales.
One of the crucial roles of a new Development Bank for Wales will be to collaborate with the