Report and publications
The Markets Spotlight focuses on the key developments in the UK economy and small business finance markets in the first half of 2024 i.e., since the Small Business Finance Markets Report 2023-24 which provided a more detailed insight into market developments. This edition highlights that the UK economic environment remained challenging for smaller businesses and how this impacted their use of bank lending, asset finance and equity finance. The Annex contains a table of the latest nominal data on a range of small business finance markets.
- The UK economic environment remained challenging for smaller businesses in the first half of 2024.
- Gross bank lending to SMEs recovered somewhat after falling for most of 2023.
- New SME asset finance continued to grow, but when accounting for inflation the growth was only modest.
- SME equity investment in the first half of 2024 was higher than in the same period a year earlier while deals remained lower.
- The latest forecasts continue to suggest the UK economic environment is likely to remain challenging over the next few years.
The UK economic environment remained challenging for smaller businesses in the first half of 2024.
Smaller businesses continued to face a combination of challenges in 24H1, despite the UK growing at a stronger pace than in recent times. In particular, input costs and interest rates remained high. This maintained the squeeze on the finances of many smaller firms.
The UK economy in 24H1 emerged from a shallow recession. In Q1 real GDP grew 0.7% compared to 23Q4. This was the strongest growth in two years. The largest contribution to real GDP came from net trade. However, rather than being driven by stronger exports, this was due to the contraction in imports (-2.7%) being larger than that in exports (-1%).
In Q2 the pace of real GDP growth moderated to 0.5%. The main contributor to real GDP was increased gross capital formation. This was partly due to business investment growing by around 1%. The latest available data for Q3 showed real GDP was broadly flat in July and August.
Fig 1. Change in real GDP
The cost of inputs remained high. In Q1 the index of prices paid by UK manufacturers for inputs was down 3% from the record high in late 2022. However, it was still 27% higher than in early 2021. In Q2 the index was broadly steady. The latest available data for Q3 showed the index was down a little from the previous quarter.
Fig 2. Producer price index for inputs
The high input costs continued to squeeze the cash flow of smaller businesses. The British Chambers of Commerce survey for Q1 showed the net balance of firms reporting cash flow had increased over the past 3 months was 2%. This was the same as in the previous two quarters and below the pre-pandemic average (c.10%). In Q2 the balance was only slightly higher at 4%. The latest available survey for Q3 showed the balance was down somewhat to the lowest in around a year.
Fig 3. Cash flow over past 3 months, net balance
Annual headline consumer price inflation continued to ease. ONS data showed that in May inflation was back at the BoE’s 2% target. In June inflation remained at 2%. The latest available data for Q3 shows that inflation in July and August was slightly above 2% but in September was below for the first time in more than three years.
During 24H1 the BoE Bank Rate remained at 5.25%, the highest in 15 years. However, the BoE subsequently reduced Bank Rate to 5% in August. When taking the decision to cut the Bank rate, the BoE judged the impact from past external shocks had abated and there had been some progress in moderating the risks of persistence in inflation.
Company insolvencies remained high. In Q1 the number was 5,799. This was down from 23Q4 (6,607), the highest in 16 years. However, this number rebounded in Q2 to 6,579. The latest available data for Q3 shows the number fell but remained higher than in Q1.
Separately, the BoE agents noted in Q1 insolvencies were no longer limited to micro firms. Their latest available report for Q3 flagged insolvencies are expected to plateau in 24H2 Read footnote text 1 .
Fig 4. Company insolvencies in England and Wales
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1
The BoE Agents’ summary of business conditions is based on discussions with at least 700 businesses across the UK every quarter.
Gross bank lending to SMEs recovered somewhat after falling for most of 2023.
The BoE reported nominal gross bank lending to SMEs in 24H1 totalled £29.7bn. This was up 2% from 23H2 but remained below 23H1 (£30.2bn). When adjusted for inflation, gross lending in 24H1 was £29.2bn. This was up 1% from 23H2 but lower than from 14H1 to 23H1.
Fig 5. Gross bank lending to SMEs by half-year
The quarterly breakdown showed nominal gross lending recovered somewhat. After falling for most of 2023, in Q1 gross lending was up 1% from 23Q4. Much stronger growth, the highest for just over a year, occurred in Q2 with gross lending up 8%. The latest available data for Q3 showed gross lending fell in July before rising in August to the highest in nearly two years.
Fig 6. Gross bank lending to SMEs by quarter
The British Business Bank’s market contacts suggest the recent pickup in gross lending was largely driven by challenger and specialist banks. This follows the share of total gross lending to SMEs by challenger and specialist banks exceeding that of the big five banks in 2023 for the third consecutive year.
The BoE does not provide a breakdown of the applications for, or approvals of, gross lending. However, an insight can be gained from the BoE agents, UK Finance data for the 7 largest UK banks, the UK Finance BVA BDRC SME Finance Monitor and our market intelligence.
The demand for lending generally remained under pressure from high borrowing costs, deleveraging and large cash reserves.
SMEs’ demand for lending from the major UK banks picked up slightly in 24H1 but remained weak. The number of SME applications for loan facilities was 46,339. This was up from 23H1 (34,973) but still only around two-thirds of that in 29H1 (73,305). The story for the nominal value of loan applications was similar.
Fig 7. SME applications for loan facilities to the 7 largest UK banks
Likewise, the BoE agents reported in Q2 that the demand from their business contacts for new lending continued to be weak. This was attributed to high borrowing costs, deleveraging and cash reserves remaining relatively large.
Borrowing costs reached record highs in 24H1. In Q1 the weighted average interest rate on new loans to SMEs was 7.51%. Read footnote text 2 This was up slightly from 23Q4 and the highest since records began in 2016. In Q2 it reached a new record of 7.65%. The latest available data for Q3 showed the weighted average interest rate fell slightly in both July and August.
Fig 8. Weighted average interest rate on new loans to SMEs
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2
The weighted average interest rate is calculated on a loan values basis per pound of lending. It is heavily influenced by the rates medium-sized firms pay as they receive larger loans than smaller firms. Thus, the average lending figure obscures a wider range of rates that smaller businesses face.
However, the outlook for borrowing costs improved during 24H1. This was largely due to inflation returning to the BoE target leading to widespread expectations that Bank Rate had peaked and was likely to start falling later in 2024.
The BoE agents noted in Q2 that commercial real estate (CRE) transaction volumes had grown compared to a year earlier and the pace was expected to pick up over the coming year. This was attributed to a currently stable, and likely falling, outlook for debt costs. A probable explanation is the CRE sector is typically more sensitive to changes in interest rates than others.
In Q1 the BoE agents flagged that their contacts were generally deleveraging. They noted remaining Bounce Back Loan Scheme (BBLS) obligations were still dampening the appetite of small firms. This is in line with the SME Finance Monitor for Q2 showing one-in-five SMEs were still repaying pandemic funding. It is also consistent with our market intelligence that around one-third of BBLS facilities have used one or more of the Pay As You Grow options offered under the scheme.
A relatively high proportion of smaller businesses continued to have large credit balances in 24H1. The SME Finance Monitor showed 28% of SMEs held £10,000 or more in credit balances. This was down from 23H2 (32%) but remained above pre-pandemic levels.
Fig 9. Share of SMEs holding £10,000 or more in credit balances
The recent fall in the share of SMEs with large credit balances is in line with the BoE agents noting in Q1 that their contacts were using their own cash to fund investment rather than borrowing. The agents also reported the demand for working capital finance remained stronger than that for capital expenditure. This is consistent with input costs remaining high, continuing to squeeze cash flow.
The latest available BoE agents report for Q3 flagged that firms’ demand for new credit was picking up but from a low base. While most of this demand continues to be for working capital, there were more examples of businesses borrowing to fund investment.
Smaller businesses with low profitability, limited security or high debt continued to struggle to access finance.
The supply of new lending to SMEs from the major UK banks increased slightly in 24H1 but remained relatively low. The number of SME loan facilities approved or increased was 22,352. This was up from 23H1 (19,078) but only around a third of that in 19H1 (58,771). It was a similar story for the nominal value of loan facilities approved or increased.
Fig 10. SME loan facilities approved or increased by the 7 largest UK banks
The SME Finance Monitor for Q2 reported success rates for all types of applications have improved but remain below pre-pandemic levels. The rate for the period from 23Q1 to 24Q2 was 56%. This was up from 22Q1-23Q2 (49%) but remained below 18Q1-19Q2 (74%).
The BoE agents noted in Q2 that a few firms in ‘vulnerable’ sectors which had recently been trading better reported banks’ appetite for lending had improved slightly. While the agents did not name these sectors, they have previously referred to retail, hospitality and construction as vulnerable. The agents also flagged those smaller businesses with low profitability, limited security or high debt reported that access to bank finance remained tight, though challenger banks were more willing to lend at high interest rates.
Our market contacts report there continues to be an appetite among challenger and specialist banks for lending to smaller businesses. However, their ability to do so remains threatened by high funding costs. This reflects that the cost of customer deposits, which most challenger and specialist banks largely rely on for funding, is still elevated. To compete against the major banks, challenger and specialist banks have had to pay more to attract deposits. At the time of writing, a key savings market comparison website shows the highest rates on offer are from challenger and specialist banks.
The cost of wholesale funding fell in 24H1 but remained high. The 2-year SONIA swap rate, a key benchmark of wholesale funding costs, averaged 4.46%. This was down from 23H1 (4.54%) and 23H2 (5.19%) but higher than in previous years. The latest available data for Q3 showed the average was a little lower than in 24H1.
Fig 11. 2-year SONIA swap rate
The latest available BoE agents report for Q3 showed further evidence of a mild improvement in the supply of credit. Contacts reported greater willingness to lend to businesses for investment purposes, given an improved economic outlook. However, they flagged access to credit is still a challenge for SMEs and remains difficult for firms with high debt, low profitability or limited security.
New SME asset finance continued to grow, but when accounting for inflation the growth was only modest.
Nominal asset finance new business that went to SMEs in 24H1 totalled £11.9bn, according to Bank estimates based on Financing & Leasing Association (FLA) data. This was up 5% from 23H1. The FLA noted the continued growth was supported by the commercial vehicle finance, and car finance, sectors.
The 5% growth in 24H1 compares to 7% in calendar year 2023. This is in line with our market contacts reporting that some asset finance providers indicated less demand than previously. A probable explanation is the market has broadly returned to pre-pandemic levels following the wave of pent up or forced investment that occurred after the Covid-related supply shortages ended. While SME asset finance new business in 24H1 was up 5% from 23H1, in real terms it was up only 3%.
The monthly breakdown showed nominal SME asset finance new business grew in year-on-year terms in four of the first six months of 2024. The contractions were in March and June. One of the largest contractions in March was in the plant & machinery finance sector. The FLA partly attributed this to the record level of new business reported by the sector in March 2023 ahead of the deadline for the super-deduction allowance at the end of that month.
The FLA attributed the contraction in June to companies delaying investment plans until after the general election in July and in anticipation of a reduction in Bank Rate. In addition, there were fewer working days that month than in June 2023. The latest available data showed SME asset finance new business grew in July before contracting in August.
Fig 12. SME asset finance new business
SME equity investment in the first half of 2024 was higher than in the same period a year earlier while deals remained lower.
UK SMEs raised a nominal total of £5.7bn in equity finance in 24H1, according to Bank analysis of Beauhurst data. This was up 32% from 23H1 and the highest since 22H2 (£6.1bn). It was also above the half-yearly nominal average between 2018 and 2020 (£4.3bn).
The value of equity investment has started to recover following the market contraction from 22H1 to 23H1 and company valuations have returned to more sustainable levels. There are some initial signs that the exit environment has become less challenging, given interest rates have started to fall. Higher interest rates had made initial public offerings (IPOs) and trade sales more expensive, creating difficulties for venture capital (VC) fund managers in exiting their investments.
The total number of equity deals announced in 24H1 was 1,015. This was down 15% from 23H1 and below the half-yearly average between 2018 and 2020 (1,116). The slower recovery of deal numbers, in comparison to investment values, indicates that fund managers are currently prioritising larger deals in more proven businesses.
Fig 13. Number and value of announced equity deals by half-year
The latest forecasts continue to suggest the UK economic environment is likely to remain challenging over the next few years.
Official and independent forecasters expect the pace of UK economic growth to pick up but remain modest in 2024 and be broadly steady in 2025. The most recent forecasts from the BoE, OECD and HMT comparison of independent forecasts were published from early August to late September i.e., after the general election in July.
The forecast pickup in real GDP growth in 2024 is based on expectations that easing consumer price inflation boosts real household incomes. Also, the negative impact on activity from past increases in Bank Rate is expected to fade. However, the pace of growth is forecast to remain modest because the BoE is expected to ease monetary policy only gradually i.e., Bank Rate stays relatively high. In addition, labour productivity growth is expected to continue to be weak.
The BoE expects the economy to grow by 1.3% in 2024. This is broadly in line with the OECD forecast and the average in the HMT comparison of independent forecasts (both 1.1%). The forecasts for 2024 have recently been revised up but this was largely due to economic growth in the first half of the year being stronger than had been expected.
Similarly, there is consensus about the outlook for real GDP growth in 2025. The BoE predicts growth of 1%. This is only slightly below the OECD forecast (1.2%) and the average of independent forecasts (1.3%).
The forecasts for 2024 and 2025 are well below the annual average UK economic growth reported in the decade prior to the global financial crisis (2.9%). During that period, labour productivity growth was relatively strong.
Fig 14. Official and independent forecasts of UK real GDP
Official and independent forecasters expect UK consumer price inflation to continue to ease in 2024. The BoE expects inflation to be 2.8%. Similarly, the OECD is predicting 2.7%. The inflation forecasts in the HMT comparison are provided on a basis that is not comparable with those of both the BoE and OECD. Forecasts by Oxford Economics can be used as an alternative. The latest Oxford Economics forecast published in September expects inflation to be 2.6%.
However, there is less consensus about the inflation outlook for 2025. Both the BoE and OECD expect inflation to continue to ease. The BoE predicts inflation of 2.3%, broadly in line with the OECD forecast of 2.4%. In contrast, Oxford Economics expects inflation to be unchanged from 2024 at 2.6%. The divergence reflects that Oxford Economics anticipates the energy price cap, which increased by 10% in October 2024, will rise further in January 2025.
The divergence also highlights that the BoE’s forecasts need to be viewed in the context that the central bank sets monetary policy to ensure inflation returns to the 2% target sustainably in the medium term, which currently refers to 2026, and conditions its forecasts accordingly.
Overall, the official and independent forecasts continue to suggest the economic environment facing UK smaller businesses is likely to remain challenging over the next few years. The best hope of a turnaround in smaller business finance markets is if the measures in the Autumn Budget lead to an improvement in the demand for, and the supply of, finance to grow.
Annex
The following table brings together the latest data available as of 30 September 2024 from multiple sources, to present a snapshot of the nominal values of various types of external finance – and the number of reported deals for equity investment – provided to UK smaller businesses.
Fig 15. Estimates of the flows & stocks of external finance for UK SMEs Read footnote text 3
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3
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
Small Business Finance Markets 2023/24
Our Small Business Finance Markets 2023/24 report highlights the role of finance in driving innovation across the UK’s small business population and in supporting small businesses to provide solutions to achieve the UK’s net zero targets.
| 2020 | 2021 | 2022 | 2023 | 2024 | YTD change on previous year | ||
|---|---|---|---|---|---|---|---|
Bank lending flows £bn Gross flows Read footnote text 4 Source: Bank of England | 104.9 | 57.7 | 65.1 | 59.2 | 39.8 (Aug) | +0.7% | |
Bank loan stock £bn Outstanding amount Read footnote text 5 Source: Bank of England | 205 | 200 | 188 | 175 | 170 (Aug) | -5.1% | |
Bank overdraft stock £bn Outstanding amount Read footnote text 6 Source: bank of England | 8.3 | 8.7 | 8.9 | 8.6 | 8.4 (Aug) | -9.1% | |
Total bank stock £bn Outstanding amount Read footnote text 7 Source: Bank of England | 213 | 209 | 197 | 185 | 179 (Aug) | +3.6% | |
Asset finance flows £bn Source: FLA Read footnote text 8 | 16.0 | 19.6 | 21.9 | 23.5 | 15.6 (Aug) | +3.6% | |
| Other gross flows of SME Finance | |||||||
| Private external equity investment £bn | 10.2 | 20.3 | 17.0 | 8.8 | 5.7 (Jun) | +32.0% | |
| Source: Beauhurst Read footnote text 9 | No. of reported deals | 2465 | 3036 | 2868 | 2152 | 1015 (Jun) | -15.3% |
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4
Data exclude overdrafts and covers loans in both sterling and foreign currency, expressed in sterling. The total may not equl the sum of its components due to rounding.
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5
Movements in amounts outstanding can reflect breaks in data series as well as changes in the underlying flow.
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Movements in amounts outstanding can reflect breaks in data series as well as changes in the underlying flow.
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Movements in amounts outstanding can reflect breaks in data series as well as changes in the underlying flow.
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The Finance & Leasing Association (FLA) whose members make up 90-95% of the market
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Beauhurst is a data provider that records announced equity deals including crowdfunding deals.
Disclaimer
British Business Bank plc has made every effort to use reliable, up to date and comprehensive information and analysis in this report, but no guarantee, warranty or representation, express or implied, is made by British Business Bank plc or its subsidiaries as to the completeness or accuracy of any information or analysis, facts or opinions contained in this report. This report does not constitute advice of any kind including legal, financial, investment, tax or other specialist or professional advice. Recipients should always seek their own appropriate professional or specialist advice or support before making any decision based on the information and analysis contained in this report. British Business Bank plc and its subsidiaries accept no liability for any loss suffered by any person who relies on anything in this report.