Record levels of smaller businesses sought external financial support in 2020, with further significant demand expected in 2021, finds British Business Bank research
- Almost half (45%) of SMEs applied for external financial support in 2020, compared to 13% in 2019
- Gross bank lending to SMEs up 82% to £104bn, with significant further demand expected in 2021
- In the 4th quarter of 2020 33% of smaller businesses expected to shrink over the next 12 months
- 89% of businesses seeking finance in 2020 did so because of the impact of Covid-19
Published today, the British Business Bank’s Small Business Finance Markets 2020/21 report highlights a surge in applications for external financial support, including government and local grants, among small and medium sized businesses (SMEs), with almost half (45%) of all SMEs surveyed saying they applied for external financial support in 2020, compared to 13% in 2019. At the same time, gross bank lending (excluding overdrafts) to smaller businesses rose to £104bn in 2020, 82% higher than in 2019, driven by use of the government loan schemes.
The report suggests there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic and pivot towards growth, adapt to life outside the EU, improve productivity and transition to a new net zero economy.
“This has been an especially challenging period for smaller businesses with external finance playing a vital role in business survival in the face of the Covid-19 pandemic. The British Business Bank has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”
Catherine Lewis La Torre, CEO of British Business Bank
Surge in use of government-backed loans and grants while bank overdraft applications flatline
Businesses shifted away from most traditional forms of external finance to utilise government-backed finance schemes and support.
Reflecting this, the utilisation of bank overdrafts, credit cards and asset finance all fell, while the only increase in the usage of traditional repayable external finance was seen in loans, up from around 10% in previous years to 25% in 2020. This is in reflected in BBLS and CBILS lending data, which showed around 1.5m facilities approved by the end of 2020. The use of government grant funding by businesses also increased significantly, from 2% in 2019, to 31% in 2020.
External finance most often sought for cashflow with some investing for growth
The report shows that nine in ten (89%) businesses seeking external financial support in the past year did so because of the impact of Covid-19, with 75% of these SMEs seeking external financial support to help with cashflow. Encouragingly 8% sought finance, at least in part, to pivot or change their business model and 7% to invest in the digital capability of their business.
Both cash balances and debt have risen
The majority of sectors saw between 20% and 30% of their SME population take up a loan during the pandemic, and British Business Bank data shows that across both BBLS and CBILS, the majority (59%) of SMEs accessing government-backed finance schemes have borrowed more than 20% of their reported turnover.
Turnover decline rates for businesses of all sizes were over three times their respective prior five-year average, illustrating the scale of disruption across all businesses. The smallest SMEs have experienced the largest declines in turnover. In Q3, 49% of zero employee firms reported a fall in turnover over the previous 12 months compared to 38% of businesses with 50-249 employees.
Additionally, a significant proportion of finance facilities taken out because of Covid-19 remained unspent by Q3 2020. Only 23% of SMEs had spent all of their facilities, and 19% reported they had not spent any.
A continued reduction in operating expenses combined with significant government financial support and precautionary saving led to a 20% rise in deposit holdings since the start of the year to a record £252 billion according to UK Finance data.
The report finds that record cash balances on the one hand and increasing debt levels on the other indicate that there are both a sizeable number of smaller businesses in a position to borrow further in 2021 and a sizeable number likely to struggle with debt repayments. High levels of debt, and in particular the number of businesses with higher debt to turnover ratios, suggests a potential drag on viable applications for finance in 2021.
Moving towards recovery
In the 4th quarter of 2020, more than a third, (37%) of smaller businesses expected to stay the same size over the next 12 months, 33% expected to shrink, and 4% to sell or to close. Only one in five (21%) were expecting to grow, compared to 28% the previous year. Small (10-49 employees) and medium (50-249 employees) sized businesses were most likely to expect to grow (35% and 38% respectively) compared to 21% overall. SMEs in business services (25%) and production (23%) sectors were most optimistic about their prospects for growth over the next year, with businesses in construction and other services sectors least optimistic (both 17%).
The report suggests there could be significant further demand for funding in 2021, as businesses continue to recover from the effects of the pandemic. There are positive indicators that banks currently look to have sufficient capital and could support further lending. Due to the dominance of government emergency schemes, non-bank and alternative finance lenders have been less active in 2020 and seen lower demand for their products. The previous five years to 2020 saw significant growth in alternative finance flows to smaller businesses, and these lenders expect activity to resume when demand returns.
In addition to capacity held by private sector providers, British Business Bank’s programmes can meet demand for finance from smaller businesses, and to help the UK build back better. The Bank’s Start Up Loans programme saw successful applicants reaching a peak in June 2020, and a record £126m of funding drawn down in 2020, the highest since the scheme began and up 41% from 2019.
The Bank also has a wide range of interventions aimed at supporting venture and growth capital. This type of finance is vitally important to high-growth firms which have the potential to provide jobs and economic growth. British Patient Capital, aimed at this area of the market, has capacity to deploy an additional £1.5bn to support investment in these types of businesses.
Working with government, the Bank has also developed the Recovery Loan Scheme to ensure businesses of any size can continue to access loans and other kinds of finance up to £10 million per business once the existing Covid-19 loan schemes close, providing support as businesses recover and grow following the disruption of the pandemic and the end of the transition period.
Notes to Editors
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’s core programmes support nearly £8bn of finance to almost 94,800 smaller businesses. Since March 2020, the British Business Bank has also launched four new Coronavirus business loan schemes, delivering more than £72bn of finance to over 1.5m businesses.
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 British Business Bank Finance Hub provides independent and impartial information to businesses about their finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success. In light of the coronavirus pandemic and EU Exit, the Finance Hub has expanded and it now targets a wider business audience. It continues to provide information and support for scale-up, high growth and potential high growth businesses, but now provides increased content, information and products for businesses in survival and recovery mindsets. The Finance Hub has been redesigned and repositioned to reflect this, during this period of economic uncertainty.
British Business Bank plc is a public limited company registered in England and Wales, registration number 08616013, registered office at Steel City House, West Street, Sheffield, S1 2GQ. It is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at www.british-business-bank.co.uk
The 2020 SME Finance Survey was undertaken by Ipsos MORI. Findings are based on 4,125 telephone interviews with small and medium businesses (i.e. enterprises with under 250 employees) conducted between 27 August and 25 November 2020. Data was weighted to reflect the 2020 SME business profile published by the Office for National Statistics.
 Figures as at end of June 2020
 Figures as at 28 January 2021