Small business finance conditions continue to improve but caution over external finance slows growth

• Overall volume of lending to smaller firms is up, with peer to peer business lending and asset finance higher than previous years
• Fewer small businesses expecting to grow this year (37%) compared to 2016 (56%)
• Majority of small businesses (71%) would accept slower growth rather than borrow

The British Business Bank’s latest comprehensive Small Business Finance Markets report finds that credit conditions continue to improve for smaller businesses, with eight consecutive quarters of growth in net bank lending to small businesses.^* Asset finance and peer-to-peer business lending grew particularly strongly in 2016, reaching £16.8bn and £1.3bn respectively, although the latter remains small compared to overall gross bank lending. [P12]

Economic uncertainty has had an impact on small business confidence, however. The Bank’s Business Finance Survey – commissioned in the Autumn as part of the wider report– finds a drop in the number of smaller firms expecting to grow in the coming year, down from more than half (56%) in 2015, to just over a third (37%) in 2016. [P17]

The majority of the UK’s small firms say they are still wary about seeking external finance, with 71% indicating that they would prefer to grow at a slower rate, rather than borrow to grow faster. [P31] This is reflected in falling application rates , with those seeking new debt facilities falling to 6% of SMEs in the first half of 2016 (down from 11% in 2012). [P30]

The report also found that the number of equity investments in the UK smaller businesses dropped by 17% in 2016 following a record year in 2015 [P51], and both use of and awareness of equity finance – especially important for growing businesses – continues to show marked regional disparities. Equity finance usage remains clustered in London and the South-East, with more than half (58%) of total deals and two thirds (69%) by value occurring in these two English regions. [P22]

In response, the report identifies three key areas in which the British Business Bank will continue to focus its support for smaller business as a means of raising the growth potential of the UK economy and to support the Government’s Industrial Strategy:

• Supporting scale-ups: The Bank already provides strong support for early-stage equity through its Angel CoFund and its Enterprise Capital Funds programme, which has a total investment capacity of over £870m. It has also has begun accepting proposals for the £400m of long-term equity funding pledged in 2016’s Autumn Statement. Additionally, the Bank’s Help to Grow programme provides debt finance of up to £2m to scale-up firms.
• Closing regional imbalances: The Bank’s Northern Powerhouse Investment Fund (NPIF) – officially opening for business tomorrow – and Midlands Engine Investment Fund (MEIF) will provide a total of £650m to regions outside the South East – 40% of which will be provided as equity finance.
• Raising awareness and confidence: The Bank will continue to work with its partners to increase awareness, understanding and confidence amongst small businesses about the range of finance options available across the UK, particularly through the Business Finance Guide. The Guide, published jointly with the Institute of Chartered Accountants in England & Wales and 21 other business organisations, outlines the finance options available to businesses at all stages. The Business Finance Guide is accessible at thebusinessfinanceguide.co.uk/bbb

Keith Morgan, CEO of British Business Bank, said: “2016 saw smaller firms benefiting from improving credit conditions and encouraging growth in the volume of alternative finance available. This provides small businesses with greater choice and improved opportunities to find the right finance for their needs.

While this continued improvement is welcome, our report shows that smaller businesses still face challenges on their growth journey. Despite the improvement in finance markets, many seem to be holding back on their ambition, not simply because they can’t access finance but because they’re cautious about seeking it in the first place.

“Evidence in today’s report helps shape and direct the Bank’s efforts. Based on these insights, we will continue to focus our efforts on three key areas to help raise the growth potential of small businesses across the UK: providing capital to the scale-up businesses that play an important role in driving economic growth; addressing regional imbalances with initiatives like the Northern Powerhouse Investment Fund; and helping more small business know about and have confidence in using the finance options open to them.

“We already work with more than 90 partners across the country to support a diverse range of finance options to more than 54,000 smaller businesses, enabling the UK’s finance markets to provide the range and depth of finance that our small businesses need to grow and succeed.”

Margot James, Small Business Minister and Scale Up Champion, said: “The Government’s industrial strategy recognises the importance of businesses across the country being able to access the finance they need to grow. I want firms to have the confidence to invest in the opportunities available to them and it is encouraging that this report highlights a record increase in lending from alternative providers.

“Last year we gave an extra £400 million to the British Business Bank to help unlock later stage venture capital investment. As a country we already have an excellent record in creating new businesses. The Government is now focused on tackling the barriers faced by those looking to scale up, particularly outside London and the South East.”