Since 2014, this yearly report has provided a comprehensive and independent assessment of the funding landscape for smaller businesses. It is a trusted and important information source, informing discussions between policy makers and market participants, alongside our other specialist reports as a Centre of Expertise on smaller business finance.
This year’s report finds that, despite recent economic difficulties, there are some reasons for optimism.
Key findings
Firstly, the report finds that asset finance grew for the third year in a row, increasing by 7% in 2023 to £23.5bn, the highest level on record.
This increase follows a rise of 11% in 2022 and 23% in 2021 and highlights the continued rebound in the asset class as supply chain pressures have eased and smaller businesses have looked to replace ageing vehicles and machinery.
Secondly, the use of external finance by smaller businesses saw a consistent rise over the year, growing from 41% in Q1 to 50% in Q3.
The rate of this increase indicates a growing need for finance to support cash flows, however, with a greater reliance on credit cards (use is up from 12% of smaller businesses in Q1 to 20% in Q3) and overdraft finance (up from 11% in Q1 to 17% in Q3).
Thirdly, and for the third consecutive year, challenger and specialist banks account for a higher share (59%) of total gross lending than the big five banks (41%).
This is welcome, as one of the Bank’s key objectives when it was created in 2014 was to diversify the banking landscape and provide greater choice for our customers, smaller UK businesses.
The lending landscape has also changed considerably since 2014, with this year’s report revealing that 60 new banking licences were granted in the last decade. 36 of those licences were issued to providers serving smaller businesses, with a third of those having been supported by the British Business Bank.
Non-bank lenders have also addressed specific, underserved segments of the market with growth in lending from private debt funds, peer-to-peer lending and invoice and asset-based finance.
The final piece of good news is that the UK business private sector smaller businesses population increased to 5.6m UK at the start of 2023, the first rise since the start of the Covid-19 pandemic, driven by increased numbers of unregistered businesses.
Challenges
Whilst there have been a number of positives to reflect on, there have also been challenges which we must recognise.
The last decade has been a challenging one for the UK’s smaller businesses, with several economic shocks, including the Covid-19 pandemic and more recently, supply chain shortages and high energy prices caused by the invasion of Ukraine, with a knock-on increase in inflation and interest rates.
The total stock of bank lending in 2023 was £185bn, falling by 12% in real terms compared to 2022. Gross bank lending to smaller businesses was £59.2bn in 2023, 9% lower than 2022, but remains the third joint highest, on par with 2016. This decline in 2023 reflects higher borrowing costs and economic uncertainty weighing on the demand for lending. Banks were also more cautious about the ability of businesses to repay.
Finally, flows of equity investment declined to levels last seen in 2020. Smaller businesses raised £6.5bn of equity finance over the first three quarters of 2023, 53% less than during the same period in 2022.
However, 2023 still remains the fourth-highest year on record, with investment now appearing to be stabilising at around £2bn per quarter in 2023, a relatively high level when looked at over the longer term.
The British Business Bank will be doing its utmost to support the continued growth and success for UK smaller businesses as we head into 2024 and beyond.
Matt Adey, Director of Economics, British Business Bank