As part of our ongoing monitoring of market conditions, our quarterly Markets Updates provide an overview of SME finance markets, drawing on the latest evidence on estimates of stocks and flows of external finance used by SMEs in the UK. This includes bank lending, equity deals and asset finance.
This January update highlights that bank lending remains broadly unchanged while asset finance and equity investment flows grew modestly.
Aggregate flow and stock of finance to smaller businesses, £ billions
The table below brings together the latest data from multiple sources, to present a snapshot of the current values of various types of external finance – and the number of reported deals for equity investment – provided to UK smaller businesses.
|2014||2015||2016||2017||YTD 2018||YTD change on previous year|
|Bank lending stock|
|Outstanding amount £bn||167||164||166||165||166|
|Bank lending flows|
|Net flows £bn (a)||-2||2||3||1||+0.4|
|Gross flows £bn (b)||53||58||59||57||52.8|
|Other gross flows of SME finance|
|Private external equity investments|
|Investment value £bn||2.48||3.70||3.11||5.89||4.65 (Q3)||+3.8%|
|No. of reported deals||1364||1498||1405||1487||1079|
|Asset finance flows £bn|
The information contained in this table should be viewed as indicative as data and definitions are not directly comparable across different sources. There can be some double counting across estimates in different parts of the table. Flows data are cumulative totals for the year or to the date stated. Non-seasonally adjusted.
(a) Net flows figures do not always reconcile with change in stock because of differences in statistical reporting.
(b) Data exclude overdrafts and covers loans in both sterling and foreign currency, expressed in sterling.
Net lending flows broadly unchanged amid weak demand and tighter supply in some sectors
Gross lending to SMEs between January and November 2018 was little changed, rising by only 0.6% compared to the same period in 2017, according to the latest Bank of England data. However, due to SME loan repayments increasing by a somewhat larger 1.2%, the net flow of bank loans to smaller businesses in the year to November fell to £0.4 billion from £0.7 billion in the same period of 2017.
Demand for finance continues to be weak. The SME Finance Monitor reported that the share of smaller businesses using external finance rose slightly to 38% in the three months to November 2018, but is still down from 44% in 2012. The share of SMEs with large credit balances remains relatively high, which may be contributing to the weakness in demand. Over the same period, 24% held more than £10,000 in credit balances, maintaining the increase seen since 2012 when 16% held such sums. The SME Finance Monitor also found that most smaller businesses with large credit balances reported less of a need for external finance.
There are signs that economic and political uncertainty is weighing on SMEs’ confidence and investment intentions, potentially affecting the demand for finance. In Q4 2018, the FSB Voice of Small Business Index fell to its lowest point since 2011. More than two-thirds (67%) of small firms do not expect to increase investment in the coming three months, and the share planning to actively decrease investment (15%) was the highest in more than two years.
At the same time, there are further signs that the supply of credit is tightening for SMEs in sectors that are seen as struggling. In Q4 2018, the BoE Agents’ summary of business conditions reported that the availability of credit continued to tighten for companies (including SMEs) in sectors that are more vulnerable to an economic slowdown such as construction, procurement and consumer-facing businesses. Also, there were some reports that banks were asking more detailed questions about the anticipated impact of Brexit on businesses that applied for loans.
Asset finance volumes grow but at a slower pace
Data from the Finance and Leasing Association (FLA) shows new asset finance volumes to smaller businesses were £15.4bn in the year to October. This is more than 2% higher than in the same period of 2017 but well down from the double-digit growth of recent years. It is possible that the weaker growth is again due to uncertainty weighing on business investment, as the industry finances approximately one-third of such investment.
Equity finance volumes increase while deal numbers are lower
The value of private equity deals in Q3 2018 was almost £1.5 billion, the sixth consecutive quarter of investment values above £1 billion. This brings the total value of equity invested in UK SMEs in the first three quarters of 2018 to over £4.6 billion, up 3.8% from the same period in 2017. However, deal numbers were 6% lower than in the corresponding period of 2017, which signals an increase in deal sizes driven by a small number of larger deals.
Our 2018/19 Small Business Finance Markets report, which will look at market developments in more detail including regional comparisons and deeper dives into the demand side, will be launched on 11th February 2019.