What is the Small Business Finance Markets Report?
The British Business Bank’s annual Small Business Finance Markets Report is a comprehensive and impartial assessment of 2021/22 finance markets for smaller UK businesses.
This is a summary of key findings and conclusions from the 2022 report.
The full report can be accessed here.
Why does equity finance matter?
Equity finance is a driver of high growth, innovative companies that can respond quickly to new opportunities created in the market, and help address emerging and long term global challenges.
About the British Business Bank
The British Business Bank is the UK’s economic development bank. Our mission is to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by supporting access to finance for smaller businesses. The British Business Bank delivers a range of both debt and equity programmes, ensuring that small businesses can access to finance that is right for their needs at the right time.
Snapshot summary
- In 2021, gross bank lending to smaller businesses fell, marking a return to pre-pandemic levels, while equity investment grew across the board.
- In 2022, output and investment growth should create demand for finance.
- In the longer-term, external finance presents opportunities to unlock sustainable growth, but:
- female-led and Ethnic Minority-led businesses are missing out;
- businesses operating in places with ‘thinner’ finance markets also face additional challenges;
- breaking down barriers to smaller business finance and accelerating finance use will be vital to achieving net zero.
Key findings
What happened in 2021?
1. 2021 was a year of contrast between debt and equity smaller business finance markets
Debt
- Gross bank lending to smaller businesses in the UK fell by 45% in 2021.
- The £57.7bn lent to smaller businesses in 2021 marked a return to pre-pandemic levels, after a record £104.8bn was recorded in 2020.
- Diversity of lenders also shifted dramatically, with challenger and specialist banks accounting for a record 51% of lending, up from just 32% in 2020.
- Alternative finance markets such as private debt, asset finance, and invoice finance and asset-based lending all saw rebounding levels of activity after a difficult 2020.
Equity
- In contrast to debt finance, smaller business equity markets have seen growth across the board in 2021.
- In the first three quarters alone, £14bn of SME equity investment was recorded which already exceeds the £8.7bn invested in 2020.
- Competition for deals has played a big part in driving investment levels through its effect on deal sizes which rose to an average of £8.4m.
- 2021 was also a strong year for equity exits, financial returns and fundraising. The 258 exits during the year released value of more than £35bn contributing to increases in several measures of financial returns.
What is the outlook for 2022?
2. Output and investment growth in 2022 should create demand for finance
Small Business Finance Markets Report 2021/22
The British Business Bank’s annual Small Business Finance Markets Report is a comprehensive and impartial assessment of 2021/22 finance markets for smaller UK businesses.
- The Bank of England, the Office for Budget Responsibility and a range of independent forecasters all expect strong growth in 2022. GDP is expected to increase by between four per cent and six per cent and business investment by between 14% and 16%.
- Growth at these levels should strongly support finance demand in 2022 but there are some potentially countervailing forces:
- High inflation raises the prospect of further interest rate increases.
- There are increased debt levels among some smaller businesses. An estimated 600,000 smaller businesses borrowed for the first time and many more increased finance use.
- Prospects for further demand among new and existing borrowers will be influenced by how their debt positions evolve over the coming year. Survey data from late 2021 shows that less than half of the smaller businesses that took out finance in the wake of the pandemic had spent all of their facility.
What matters for the longer-term?
3. In the longer-term, finance can unlock sustainable growth, but female-led and Ethnic Minority-led businesses are missing out
- Evidence from the Bank’s programmes and beyond shows the transformative impact of external finance. There are business leaders from all backgrounds that recognise this impact but those from an Ethnic Minority background are most likely to be open to using finance in their business.
- Half of Ethnic Minority-led businesses are open to using finance for growth compared to around three in 10 White-led businesses.
- Though Ethnic Minority-led businesses are more open to using finance, they are also more likely to be discouraged from doing so. In 2021, 20% of Ethnic Minority-led businesses wanted to apply for finance but were stopped by something compared to just 8% of White-led businesses.
- Key reasons for discouragement include expecting to be rejected, not knowing where to find appropriate finance and concerns over the decision taking too long or being too much hassle. Female-led businesses are also more likely to be discouraged than male-led businesses and typically cite similar factors.
- Ethnic Minority-led businesses that do apply for finance face notably higher rejection rates. Between 2018 and mid-2020, 52% of Ethnic Minority-led businesses that applied for finance were turned down compared to just 22% of White-led businesses.
- The underrepresentation of both women and people from Ethnic Minority backgrounds in investing teams is likely to contribute to the stark underrepresentation of female-led and Ethnic Minority-led businesses receiving equity investments, due to the importance of networks and warm introductions in the equity space.
4. Businesses operating in places with ‘thinner’ finance markets miss out too
- It is not only Ethnic Minority and female-led businesses that face barriers to accessing finance; businesses operating in places with thinner finance markets face additional challenges too.
- Smaller businesses outside of London are less likely to be open to using finance, have lower awareness levels of certain finance forms and are less likely to have finance experts in their business.
- On the supply-side, entrepreneurs operating outside of London will have fewer equity and private debt providers nearby. Distance matters for these complex and flexible forms of finance and while investor presence has improved outside of London, the capital’s status as a globally-leading finance ecosystem means gaps in investor presence in the UK have actually widened.
- London companies received 70% of equity investment in 2021 to date.
5. Breaking down barriers to smaller business finance and accelerating finance use are vital to achieving net zero
- All businesses have a role to play in reaching net zero, whether they are developing innovative green technologies or adopting them.
- 2021 was a good year for these companies who are often badged as ‘clean tech’. Clean tech encompasses a wide variety of businesses that are helping to make more sustainable versions of everyday products used by most of the population, such as cars, packaging, and meat, as well as new inventions designed to make homes and businesses more environmentally sustainable. Clean tech companies attracted £572m of equity investment across 147 deals spanning 46 different sectors in the first three quarters of 2021.
- This investment is increasingly coming from investors that do not have an explicitly environmental or social impact focus, demonstrating that factors are becoming increasingly mainstream. 83% of fund managers who responded to our 2021 survey considered environmental factors in investment decisions with 52% considering these factors significant or integral to investing.
- Despite these positive developments, still only 11% of smaller businesses have used finance to reduce their environmental impact.
- Given that all businesses will need to reduce their carbon emissions, the finance needs of future eco-adopters are incredibly diverse. Debt products such as bank loans and asset finance are likely to feature prominently, but the finance system as a whole will need to continue to reorient itself toward environmental goals.
- The Bank, with our mission to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by supporting access to finance for smaller businesses, is uniquely placed to help drive this continued reorientation over the medium-term.
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