The quarterly Markets Update provides an overview of the main developments in SME finance markets. It updates key data contained in the Small Business Finance Markets 2019/20 report for the period from July to September, where available. The Update highlights that the COVID-19 outbreak continues to have a major impact on the use of external finance by UK SMEs.
Small business confidence continued to weaken even before the resurgence in COVID-19 infections and introduction of additional restrictions
The FSB Voice of Small Business survey for Q3 2020 showed that the confidence index was at -32.6. This reflects that the share of small businesses viewing their prospects as worse over the next three months (66%) was larger than those expecting an improvement (34%). The index was negative for the ninth consecutive quarter, the longest stretch since the survey began in 2010. The survey was conducted in late September, ie before the resurgence in COVID-19 infections and introduction of additional restrictions. The index was previously at -5 in Q2 and -143.4 in Q1, a record low.
Small business confidence index
Source: FSB Voice of Small Business Index
Real GDP rose 2.1% in August compared to the previous month, according to the provisional estimate from the Office of National Statistics. This was the weakest growth since the economy started to recover in May after contracting in April by the most since the survey started in 1997. Overall, real GDP in August was 9.2% below the pre-pandemic levels seen in February. By sector, growth weakened in services, production and construction for the second month in a row.
Real GDP, monthly change (%)
Source: Office of National Statistics
Similarly, the composite (manufacturing and services) purchasing manager’s index for October indicated that private sector activity grew at the slowest pace in four months. The PMI fell from 56.5 in September to 52.1. By sector, the main driver was services, with respondents often citing tighter restrictions across hospitality and the impact of local lockdowns on general consumer spending. The survey was conducted 12-28 October, ie amid the resurgence in infections and introduction of additional restrictions but before the start of the England-wide lockdown.
The ONS Business Impact of COVID-19 Survey recently highlighted the negative impact of the pandemic on business investment. The results of Wave 15, for the period 21 September to 4 October 2020, showed that the outbreak led 23% of firms to either stop capital expenditure or reduce it to lower than normal for the time of year.
Separate ONS data showed that business investment fell 26.5% in Q2 2020 compared to the previous quarter. This was the largest drop since the data series began in 1997 excluding the effects of a re-classification in 2005. It compares to a decline of 9.6% in Q1 2009, ie during the financial crisis. By type of asset, the largest fall was in transport equipment, followed by other buildings & structures, ICT equipment & other machinery & equipment and intellectual property products.
Business investment, quarterly change (%)
Source: Office of National Statistics
The BoE Agents summary of business conditions for Q3 2020 (conducted early August to early September) indicated that investment intentions remained significantly weaker than a year ago. It also noted widespread reports from businesses that they had postponed or cancelled investment to preserve cash. Most contacts remained cautious about the economic outlook and their cash positions, with investment tending to be limited to essential equipment or maintenance rather than discretionary or strategic projects.
However, the British Chambers of Commerce Quarterly Economic Survey for Q3 2020 (conducted late August to mid-September) showed that investment plans fell by less than in the previous quarter. The net balance of firms expecting to increase investment in plant and machinery in the next year was -20%. This compares to -43% in Q2, the lowest since it started in 1989. Similarly, the CBI SME Trends Survey for the three months to October reported that the share of manufacturers expecting investment in buildings and plant & machinery to decline in the next year was smaller than in the previous period.
Official and private sector forecasters have revised down their expectations for the UK economy for this year and next. Real GDP is now expected to fall by around 10-11% in 2020 before rising 6-7% in 2021. In the table below only the BoE forecast was published after the UK government announced the England-wide lockdown.
|Official and private sector forecasts of UK real GDP|
|Bank of England (November)||-11.0%||7.5%|
|EY Item Club (October)||-10.1%||6.0%|
|Average of independent forecasts (October)||-10.2%||5.9%|
Gross bank lending in Q3 2020 was around half of its value in the previous quarter, driven by easing activity in government loan schemes
The BoE Bankstats data for September, the most up to date on actual drawdowns, showed that gross bank lending (excluding overdrafts) to SMEs in Q3 2020 was £22.6 billion on a seasonally adjusted basis. This was down 52% from Q2 but still well above pre-COVID highs. The lower gross lending was driven by easing activity in government loan schemes. The total value of facilities approved under the Bounce Bank Loan Scheme and the Coronavirus Business Interruption Loan Scheme in Q3 2020 was £14.1 billion. This was down 65% from the previous quarter.
Quarterly gross bank lending (excluding overdrafts) to SMEs (£bn)
Sources: Bank of England Bankstats and British Business Bank calculations
Gross bank lending in the first three quarters of 2020 was £84.7 billion (s.a.), double that in the same period last year.
The BoE Agents summary for Q3 noted that the demand for credit among SMEs had softened since the initial surge in applications for BBLS and CBILS but remained strong. The demand was mainly to cover working capital and cash-flow needs as SMEs reopened after the first national lockdown. Similarly, the BoE Credit Conditions Survey for Q3 2020 (conducted 1 to 18 September) showed that lenders reported the demand for lending from small businesses increased in the past three months but by less than in Q2. The British Business Bank’s market contacts had expected the demand for lending to strengthen further prior to the originally planned closure of applications for BBLS and CBILS in late November but the government has recently extended the closure date of these schemes to 31 January 2021.
The total value of SME loan repayments in Q3 2020 was £12 billion (s.a.). This was down 24% from the previous quarter and the lowest in seven years. A probable explanation for the fall is that those SMEs accessing BBLS and CBILS are not required to make any repayments during the first 12 months.
Quarterly loan repayments by SMEs (£bn)
Sources: Bank of England Bankstats and British Business Bank calculations
Despite the fall in Q3, repayments for the first three quarters of this year (£42.4 billion) are up 4% compared to the corresponding period in 2019 and the third highest on record. The monthly breakdown shows that repayments rose sharply in May and remained elevated in June before trending lower. This, along with applications for BBLS opening in May, is in line with our market contacts reporting that some SMEs substituted existing debt with BBLS and CBILS because they are less expensive.
Gross bank lending to SMEs in Q3 2020 exceeded loan repayments, resulting in positive net lending of £10.6 billion. This was down from £31.2 billion in the previous quarter but still the second largest since the data series began in 2011. Net lending in 2020-to-date now stands at £42.3 billion, the largest on record and significantly higher than the £1.8 billion recorded in the corresponding period of 2019.
The BoE Credit Conditions Survey showed that lenders reported a fall in small businesses’ demand for total unsecured lending in Q3. This was largely driven by a decline in the demand for other unsecured lending (which excludes credit cards but includes overdrafts, lines of credit and invoice finance).
Demand of small businesses for unsecured lending, net balance (%)
Source: BoE Credit Conditions Survey
UK Finance data for the seven largest UK banks also shows that overdraft approvals have recently weakened significantly. The total value of SME overdraft facilities approved or increased in August was £243 million. This was down 17% from the previous month and the lowest since the data series began in 2011. It followed a modest rise in July and very large falls in the two months prior.
Overdraft facilities approved or increased in the month (£m)
Source: UK Finance
Similarly, UK Finance data on invoice and asset-based finance shows that SMEs received £5.1 billion in advances in Q2 2020. This was down 43.1% from the previous quarter and the lowest since the data series began in Q1 2015. It was also 45.1% lower than in Q2 2019. The weakness of invoice and asset-based finance, along with other traditional forms of working capital finance, is consistent with reports that some SMEs have used BBLS and CBILS to finance their businesses in recent months or decreased their use of external finance.
However, the smallest businesses (ie annual turnover of less than £500,000) have increased their use of invoice and asset-based finance. This is in line with the long-term trend for firms of that size. They received £960 million in advances in Q2 2020, a record high and up 2.9% from Q1 and 16% on the same quarter in 2019. At the same time the number of the smallest businesses using invoice and asset-based finance fell in Q2 for the fifth consecutive quarter. This led average advances to rise for the seventh quarter in a row to a record high of £84,604.
Total SME asset finance new business in Q3 2020 was £4 billion, according to our estimates based on Finance & Leasing Association data. This was down 16% from the same period in 2019. It followed a fall of 49% in Q2 this year compared to Q2 2019. In first nine months of this year SME asset finance was £10.8 billion, down 27% from the same period last year. The weakness of asset finance is in line with the previously discussed falls in business investment reported by official data and business surveys.
Monthly SME asset finance (£bn)
Source: British Business Bank estimate based on FLA data
Many marketplace lenders have not reported their finance volumes so far this year, making comparisons difficult. This lack of data likely reflects the challenges faced by the industry during the pandemic, with market contacts suggesting that there has been limited lending across the sector. Of those that have reported, volumes in Q2 2020 were mostly lower compared to 2019 and especially when lending by government guarantee schemes is excluded.
British Business Bank analysis of Beauhurst data indicates that the number of announced UK SME equity deals in Q3 2020 was 403. This was down 4% compared to the previous quarter but broadly in line with Q3 last year. The investment value of the equity deals in Q3 this year was £2.3 billion. This was 45% higher than in Q2 and up 10% from the third quarter of 2019. While the decline in deal numbers in Q3 2020 is disappointing, the investment value was the third highest on record. This shows that investors still have the confidence to invest in high growth businesses.
Quarterly announced UK SME equity deals, number and value (£bn)
Source: British Business Bank analysis of Beauhurst
In the first three quarters of this year the number of announced UK SME equity deals was 7% lower than in the corresponding period last year. Similarly, their value was down 6% over the same period.
Data on equity finance can lag market sentiment due to the time it takes companies to close deals. Pitchbook’s recent European Venture Report Q3 2020 found that European VC fundraising has remained strong in 2020 thus far. If recent trends continue, annual European fundraising is set to be a record year. This suggests that capital to invest in UK companies will continue to be available going forward.
The Q3 2020 Beauhurst and Pitchbook data precede the introduction of further restrictions by the UK government and devolved nations in response to the ‘second wave’ of COVID-19 infections. The British Business Bank will continue to monitor the SME equity market.
Aggregate flow and stock of finance to smaller businesses, £ billions
The following table brings together the latest data available as at 5 November 2020 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.
Our 2019/20 Small Business Finance Markets report looks at market developments in more detail including regional comparisons and deeper dives into the demand side.
|2016||2017||2018||2019||YTD 2020||YTD change on previous year|
|Bank lending stock Source: BoE||Outstanding amount £bn||166||165||166||168||209||+25.5%|
|Bank lending flows Source: BoE||Gross flows £bn (a)||59||57||58||57||85||+99.6%|
|Other gross flows of SME finance|
|Private external equity investments Source: Beauhurst||Investment value £bn||4.0||6.5||6.9||8.5||6.4||-5.6%|
|No. of reported deals||1566||1784||1758||1832||1237||-7.1%|
|Asset finance flows £bn|
|Marketplace business lending flows|
Source: Brismo and British Business Bank calculations
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. Latest data available as at 5 November.
(a) Data exclude overdrafts and covers loans in both sterling and foreign currency, expressed in sterling and not seasonally adjusted.
Small business confidence
The table below contains historical data for the FSB Small Business Index.
 This update contains data available up until 5 November 2020