Markets Update, October 2018

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 June update highlights relatively flat bank lending but strong growth in alternative finance.

For market developments in more detail, including international and regional comparisons and deeper dives into the demand side, please see our 2017/18 Small Business Finance Markets report.

Aggregate flow and stock of finance to smaller businesses

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. Please note that (a) flows of different types of finance are not directly comparable, since data sources may duplicate funding sources, and (b) consistent and comprehensive data outlining the value of the aggregate stocks and flows is not readily available for some products.

Estimates of the flow and stock of external finance for SMEs, £ billions

  2014201520162017YTD 2018YTD change on previous year
Bank lending stock
Source: BoE
Outstanding amount £bn167164166165166 (Aug)+1.0%
Bank lending flows
Source: BoE
Net flows £bn (a)-2231-0.02 (Aug)-0.5bn
Gross flows £bn (b)5358595738.5 (Aug)+0.4%
Other gross flows of SME finance
Private external equity investments
Source: Beauhurst
Investment value £bn 2.483.703.115.893.2 (Q2)+12%
No. of reported deals 1364149814051487728 (Q2)+1.4%
Asset finance flows £bn
Source: FLA
14.415.916.718.610.9 (Jul)+2.4%

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 excludes overdrafts and covers loans in both sterling and foreign currency, expressed in sterling.

Analysis

Net lending flows flat amid weak demand and some signs of tighter supply

Gross lending in the first eight months of 2018 was little changed, increasing by only 0.4% compared to the same period last year, according to latest Bank of England data. However, due to SME loan repayments rising by a slightly larger 1.8%, the net flow of bank loans to SMEs weakened to a negative £0.5bn.

Demand for finance remains weak. The SME Finance Monitor reported that application rates fell again in the first half of 2018, with 4% of SMEs applying for a new or renewed loan or overdraft facility. This was down from 5% in 2017 and 11% in 2012. The share of SMEs holding large credit balances remains relatively high, which may be contributing to the weakness in demand. In the first half of this year 22% of SMEs held more than £10,000 in credit balances, maintaining the improvement seen since 2012 when 16% held such sums. Most SMEs with large credit balances reported less of a need for external finance.

At the same time, there are signs emerging that the supply of credit to smaller businesses is tightening. In Q3, the BoE Agents’ summary of business conditions reported that credit conditions were less favourable for small companies. In addition, the FSB Voice of Small Business Index for the same period showed that the credit availability index fell to its lowest level in more than two years.

Strong growth in equity finance volumes but deal numbers are little changed

The value of private equity deals in the first half of 2018 was £3.2 billion, which was 12% higher than in the same period of the previous year. However, deal numbers were up only slightly over the same period, which signals an increase in average deal sizes driven by a small number of larger deals. For equity market developments in more detail, please see our Small Business Equity Tracker 2018

Increased demand for asset finance

Data from the Finance and Leasing Association (FLA) shows new asset finance volumes to smaller businesses were £10.9bn in the year to July, increasing by more than 2% on the same period in 2017. This chimes with the Q3 BoE Agents’ summary, which also noted that contacts reported a growing number of small firms were taking out non-bank finance, eg via crowdfunding or online business loan providers, when they have been unable to access bank funding, or when they need a quick decision.

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, is out in February 2019.