Smaller businesses exercising caution ahead of Brexit, finds latest British Business Bank research
• One in three smaller businesses expect access to finance to become more difficult following the UK’s departure from the European Union
• Half of smaller businesses still aspire to grow over the next 12 months
11 February 2019: Published today, the British Business Bank’s 2019 Small Business Finance Markets report finds that some businesses expect an impact from Brexit, but many remain optimistic about growth.
An increasing proportion of smaller businesses expect Brexit to have a negative impact on their business (29%, up from 22% in 2017). Over one in three (34%) expect access to finance to become more difficult after departure, with only 3% expecting finding finance to become easier.
Overall, the demand for external finance has continued to fall, with just 36% of smaller businesses using external finance in 2018 (versus 44% in 2012). Despite these concerns, however, just over half (50.4%) still aspire to grow over the next 12 months.
Evidence in the report suggests a shift in behaviour amongst some smaller businesses. Some are delaying longer term investment and expansion decisions ahead of Brexit and reducing their demand for external finance, while others appear to be using external finance to put in place shorter term contingency plans.
Keith Morgan, British Business Bank CEO, said: “It is clear that a lack of confidence is affecting many smaller businesses, as evidenced by a continuing drop in demand for external finance. It is, however, encouraging to see that half still aspire to grow and that there’s increased awareness of a broader range of finance options. This will be an important factor in ensuring that smaller businesses are better placed to make the right finance choices as uncertainty diminishes and confidence returns.”
Stock of bank lending continues recent decline in real terms; alternative finance advances, but at a slower rate
Bank lending stock (£166bn) was similar to 2017 (£165bn) but this continues a decline in real terms over recent years. Gross bank lending – which makes up the biggest proportion of business finance – averaged £14.4bn per quarter. Repayments, however, were at virtually the same level – £14.3bn per quarter – meaning that net lending over the year was positive, but only by a small amount.
The growth of alternatives to bank finance has continued, albeit at a slower pace compared to 2017. Asset finance grew just 3% in 2018, compared to 10% in 2017 and peer-to-peer business lending by 18%, compared to 51% growth in 2017. While equity finance flows were up 4% (compared with a 79% rise in the previous year), the number of equity deals fell by 6%, with the rise in value being driven by larger deal sizes.
There have been signs of improvement in the UK’s equity ecosystem. There is increased funding of university spinouts – often in successful ‘clusters’ in high-tech sectors, including those identified as Grand Challenges in the government’s modern Industrial Strategy.
There is still room, however, for considerable improvement in the supply of patient capital to finance businesses with high growth potential. Despite the increase in equity finance as a proportion of GDP in recent years, the UK remains well behind the US, and there are specific challenges around the funding of businesses with female founders.
Following the Patient Capital Review, the British Business Bank has taken measures to address these issues and increase the supply of patient capital, including British Patient Capital, a new £2.5bn programme to enable more long-term investment in high growth potential UK companies.
Awareness of finance options is rising
Awareness of finance options outside of traditional lending continued to grow in 2018:
• 52% of smaller businesses aware of P2P (up from 47% in 2017)
• 70% are aware of crowdfunding platforms (up from 60% in 2017)
• 69% aware of VC (62% in 2017)
Big differences in the use of finance options between, and within, UK regions
The report examines smaller business finance in unprecedented depth, going beyond the regional picture to examine trends at a local level. Key findings include:
• Equity deals remain concentrated in London (48% – although only around a fifth of High Growth Businesses are in the Capital), and around tech clusters elsewhere, such as Manchester and Edinburgh.
• Clusters mask stark differences in equity deals numbers at sub-regional level – almost half (45%) of Local Authority Districts had zero equity deals in 2018. A further 24% only had one deal.
• Wide variation in London between local authorities – from 77 equity deals in Westminster to just one in Waltham Forest
• EIS and SEIS deals are concentrated (47%) in London and South East, and over half (57%) of Angels located in London
Addressing regional imbalances and stimulating demand
The British Business Bank has put in place a series of measures to address many of the issues identified in this year’s Small Business Finance Markets Report:
• A new UK Network – aimed at improving local and regional business finance ecosystems.
• The Finance Hub – which provides independent and impartial information on the finance options available for scale-up, high growth and potential high growth businesses.
• A third regional fund – the Cornwall & the Isles of Scilly Investment Fund (CIOSIF), in addition to the Northern Powerhouse Investment Fund (NPIF) and Midlands Engine Investment Fund (MEIF)
• A £100m Regional Angels Programme to support early-stage equity finance, especially in areas of the UK that are currently underserved.
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 £5.9bn of finance to over 82,000 smaller businesses (as at end of September 2018).
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 www.thebusinessfinanceguide.co.uk/bbb.
• 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.