Growth in small businesses using alternative finance continues, while gross bank lending flatlines, finds British Business Bank research
- Asset finance up 32%, equity finance up 131%, marketplace business lending up 374% since 2014
- Gross lending from the major banks to smaller businesses flat over last five years
- Signs of improvement in supply of business finance to level-up the regions, but more to do
Published today, the British Business Bank’s Small Business Finance Markets 2019/20 report highlights significant long-term growth in alternative finance volumes over the last five years, with a 32% increase in asset finance, a 131% increase in equity finance and a 374% increase in marketplace business lending.
The British Business Bank was set up in 2014, with objectives including increasing the supply of finance to smaller businesses where markets don’t work well and helping to create a more diverse finance market.
Five years on, its latest report finds increased diversity across the smaller business finance market with the establishment of a range of new providers, products and platforms contributing to growth in the overall volume of funding accessed. More than half (52%) of smaller businesses that sought finance in 2019 contacted a finance provider outside of the ‘Big Five’ banks.
Bank lending flatlines
Over the same five-year period, gross lending to smaller businesses by the major banks has remained largely flat, with real term growth of just 1.2%. Gross bank lending was at £56.7bn last year, compared to £53bn in 2014.
Regional access to finance improves
Although London still dominates, there are encouraging signs that the regions outside the capital are making upward progress:
- Manchester, Edinburgh and Cambridge are in the top 10 local authority districts for number of equity deals over 2019
- Yorkshire and the Humber looks likely to see a record number of new companies raising seed equity funds in 2019
- Between 2014 and 2018 the proportion of British Business Bank-supported equity deals outside of London rose from 44% to 57%
- In 2018 its Northern Powerhouse Investment Fund and Midlands Engine Investment Fund accounted for 16% and 20% of the equity deals in their respective regions.
The Bank has put in place further measures to address some of the regional and other issues identified. These include a third regional fund – the Cornwall & the Isles of Scilly Investment Fund (CIOSIF) – and a Regional Angels Programme to support early-stage equity finance, especially in areas of the UK that are currently underserved.
Despite these measures, there remains more work to do to ‘level up’ the regions. Although debt finance remains evenly spread across the UK and is closely aligned with the size of the local business population, equity finance continues to be concentrated in London (accounting for 47% of deals and 66% of investment value in 2019).
Keith Morgan, British Business Bank CEO, said: “When it comes to external finance, smaller businesses have never had a wider choice of products and providers available to them. It’s really encouraging to see significant growth in the volume of funding for businesses that are looking to finance their growth ambitions.
“Although use of the many finance options available has significantly improved, disparities between UK regions remain. The Bank will continue its work to support regional and local entrepreneurial ecosystems so that smaller businesses can thrive wherever they are.”
Business Minister Paul Scully said: “Finance for small businesses is essential to our goal of making the UK the best place in the world to start and grow a business. This report will shape our support for business leaders across the country, so they can drive innovation and growth.”
Low demand for finance products is long-standing, despite a flurry in 2019 related to EU Exit
- Demand for external finance among small businesses has remained stubbornly flat. In 2016, just over 70% would accept slower growth rather than take on external finance. This remained at a similar level (73%) in 2019.
- Although more than half (56%) of smaller businesses surveyed expected the UK’s exit from the EU to have no impact on their growth, 29% of those surveyed expected Brexit to impact their business negatively.
- Evidence suggests a slight increase in demand for finance last year, but this appears to have been for short-term finance for EU Exit preparations, with use of overdrafts (23% of businesses) and credit cards (19%) rising to their highest level since 2012.
- Just 28% of businesses expect to grow over the next 12 months (down from 36% in 2018)
In response, the Bank is rolling out a range of initiatives focused on encouraging businesses to explore their growth opportunities, informing them about their finance choices, and enabling them to find the finance best suited to their needs.
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About the British Business Bank
The British Business Bank is the UK government’s 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. Its 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 more than £7.2bn of finance to over 93,000 smaller businesses (as at end of September 2019).
As well as increasing both supply and diversity of finance for UK smaller businesses through its programmes, the Bank works to raise awareness of the finance options available to smaller businesses:
- The Business Finance Guide (published in partnership with the ICAEW and a further 21 business and finance organisations) impartially sets out the range of finance options available to businesses at all stages – from start-ups to SMEs and growing mid-sized companies. Businesses can take the interactive journey at thebusinessfinanceguide.co.uk.
- The new British Business Bank Finance Hub provides independent and impartial information to high-growth businesses about their finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success. The new site also features case studies and learnings from real businesses to guide businesses through the process of applying for growth finance.
As the holding company of the group operating under the trading name of British Business Bank, British Business Bank plc is wholly owned by HM Government and 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.
British Business Bank plc and its principal operating subsidiaries are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found on the British Business Bank plc website.