Latest British Business Bank research reveals equity and alternative finance growing strongly, but overall demand for finance remains weak among small businesses

Press release 20 February 2018

  • Equity and alternative finance demonstrate strong growth while bank lending volumes remain relatively flat
  • UK is a world leader for start-ups and has its highest-ever population of small businesses, with a record number of start-ups
  • UK’s scale-up performance improves, but is behind US in part due to less later stage VC funding
  • Demand still a challenge, with businesses reluctant to take on external finance

Published today, the British Business Bank’s 2018 Small Business Finance Markets report reveals welcome evidence that the UK’s small businesses are diversifying in their choice of finance. Although still the predominant channel, there are encouraging signs that small businesses are looking beyond their main bank for finance and turning to alternative sources.

The value of SME asset finance deals (up 12%) and peer-to-peer business lending (up 51%) in 2017 both showed strong growth. Although net bank lending volumes remained positive (£0.7bn) in 2017, they were weaker than in both 2016 (£3bn) and 2015 (£2bn). Significant increases were seen in 2017 in both the value and number of SME equity deals (up 79% and 12% respectively Read footnote text 1 ).

Long-term patient capital needed to help smaller businesses scale-up

Though the report finds that some progress has been made in developing high-growth businesses in the UK, and in the provision of equity finance to support that growth, British Business Bank analysis suggests more UK start-ups could become fast-growth businesses with greater availability of long-term patient capital. Such finance is a key ingredient in enabling firms to scale up and a significant economic impact could be made if availability was raised to the same level as the US.

The Bank’s 2017 Equity Tracker showed that UK VC funds are around one third smaller than in the US (£118m vs £180m), and that UK businesses receive fewer funding rounds than their US counterparts (an average of 1.9 rounds vs 2.7 rounds).

While scale-up businesses’ financing needs are complex, the recent Autumn 2017 Budget announcement of a programme to help enable up to £13bn of patient capital through the British Business Bank’s activities is a significant step toward meeting those needs.

UK start-up growth continues

Entrepreneurial activity in the UK remains strong, with a highest-ever population of 5.7m businesses at the start of 2017 including a record number of new businesses created (c414,000) in the preceding year.

Aversion to external finance persists

The report finds a decline in smaller business confidence and low demand for external finance is becoming entrenched as their cash balances rise. Bank analysis finds that, over the last ten quarters, only 1.7% of smaller businesses sought new loans, a record low since the SME Finance Monitor began in 2011. Less than half (43%) were confident they would get a loan if they applied, even though most new loan applications (72%) are approved. Moreover, 70% of SMEs are willing to forgo growth rather than borrow, continuing a trend identified in last year’s Small Business Finance Markets report.

A core objective of the British Business Bank is to encourage greater diversity of finance, so we welcome the growth in the uptake of equity finance and other alternatives to traditional lending. It can’t be overstated how important it is to build a more complete funding ladder for economically important high-growth businesses no matter where they are located. Scale-ups need more long-term patient capital throughout all stages of their development to be world-beating companies, and we look forward to using our new resources allocated at Autumn Budget to unlock more of this type of capital. Keith Morgan British Business Bank CEO

British Business Bank is supporting the government’s recent Industrial Strategy and Patient Capital Review, in two important areas:

Building confidence and stimulating demand: The report highlights that, particularly for smaller businesses with growth potential, there would be benefit in improving the information available to them about their finance options. The British Business Bank is introducing a new digital information hub in 2018 for smaller businesses, to better enable them to seek the finance best suited to their needs.

Patient capital: In November’s Budget, the government allocated additional resources to the British Business Bank in response to the Patient Capital Review. Enabling greater access to patient capital is a key element of helping high-growth start-ups reach scale, and of funding capital-intensive research & development-based businesses. The success of these businesses can play a vital role in the UK’s future economic growth.

Small businesses are the backbone of our economy and this Government’s Industrial Strategy is building a Britain in which they can continue to thrive. Today’s report from the British Business Bank shows that although challenges remain, more small businesses are accessing finance from a wider range of sources. The British Business Bank plays a vital role in this, which is why we are working with them to establish a new £2.5bn Investment Fund to ensure small businesses can access the finance they need to succeed. Andrew Griffiths Small Business Minister
Download the Small Business Finance Markets report Download the Small Business Finance Markets report

Further Information

Notes to editors

About the British Business Bank

The British Business Bank is the UK’s national economic development bank. Established in November 2014, its mission is to make finance markets for smaller businesses work more effectively, enabling those businesses to prosper, grow and build UK economic activity. Our remit is to design, deliver and efficiently manage UK-wide smaller business access to finance programmes for the UK government.

The British Business Bank is currently supporting over £4bn of finance to more than 60,000 smaller businesses, and participating in a further £6.6bn of finance to mid-cap businesses (as at end September 2017).

More information, including a legal structure chart for British Business Bank plc and its subsidiaries, can be found on the British Business Bank website.

As the holding company of the group operating under the trading name of British Business Bank, it is a development bank wholly owned by HM Government which is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). The British Business Bank operates under its own brand name through a number of subsidiaries, one of which is authorised and regulated by the FCA.