Markets Update, September 2017

In February we published our annual comprehensive report on small business finance markets in the UK, Small Business Finance Markets 2016/17. As part of our ongoing monitoring of market conditions, our quarterly Markets Updates provide an overview of SME finance markets, drawing on the latest evidence on estimates of stocks and flows of external finance used by SMEs in the UK. This includes bank lending, equity deals and asset finance.

Aggregate flow and stock of finance to smaller businesses

The table below brings together the latest data 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. Please note that (a) flows of different types of finance are not directly comparable, since data sources may duplicate funding sources, and (b) consistent and comprehensive data outlining the value of the aggregate stocks and flows is not readily available for some products.

Estimates of the flow and stock of external finance for SMEs, £ billions

  2013201420152016YTD 2017YTD change on previous year
Bank lending stock
Source: BoE
Outstanding amount £bn166167164166166 (Jul)+2.2%
Bank lending flows
Source: BoE
Net flows £bn (a)-2-2230.5 (Jul)-1.1
Gross flows £bn (b)4353585934 (Jul)-3.6%
Other gross flows of SME finance
Private external equity investments
Source: Beauhurst
Investment value £bn 1.532.313.583.422.73 (Q2)+59%
No. of reported deals 972130914081148597 (Q2)-1.2%
Asset finance flows £bn
Source: FLA
12.914.415.816.99.8 (Jun)+19%

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.

(a) Net flows figures do not always reconcile with change in stock because of differences in statistical reporting.

(b) Data exclude overdrafts and covers loans in both sterling and foreign currency, expressed in sterling.

Analysis

We have seen ELEVEN consecutive quarters of positive net bank lending to SMEs, Although gross bank lending fell over the year  

Survey evidence from the FSB (FSB Voice of Small Business Index, Q2 2017) and Bank of England (Credit Conditions Survey, Q2 2017) shows credit conditions remain good for SMEs, with eight out of ten of all recent (Jan 2016 to June 2017) loan and overdraft applications being successful (SME Finance Monitor, page 145).

Gross bank lending (new loans) to smaller businesses was £14.1bn in the second quarter of 2017, which is around £0.6bn lower than it was for the same period in 2016.

Positive net flow (gross new loans minus repayments) of bank loans to smaller businesses has continued, with eleven consecutive quarters of positive net lending – totaling £6.2bn (cumulative) – through to Q2 2017 (Bank of England).

The stock of bank loans and overdrafts was stable at £166bn at the end of July 2017 (Bank of England).

Both the number and value of equity deals declined in 2016, following strong growth over the previous five years

The flow of equity finance to smaller businesses declined in 2016 – the first annual decline in five years – because of a wider slowdown in equity markets worldwide. Deal numbers were 18% lower than in 2015 and investment amounts 4% lower. There was a total of 1,148 equity deals in 2016, representing an investment value of £3.4bn (Small Business Equity Tracker).

In Q2 2017, there were 304 equity deals, with a total investment value of £1.9bn. Deal numbers increased by 4% from Q1, and total investment value increased by 127% to a record £1.9bn invested in Q2 2017, since data began in 2011, (British Business Bank analysis of Beauhurst data). This strong performance was driven by several large equity deals in the quarter, including two of the UK’s unicorn status businesses both receiving funding rounds in excess of £300m.

Asset finance and marketplace lending continued to grow

Data from the Finance and Leasing Association (FLA) shows new asset finance volumes to smaller businesses were £16.9bn in 2016, an increase of 7% from 2015. Figures for the year to date ending Q2 2017 show volumes of £9.8bn – 19% higher than the same year to date period in 2016.

Origination volumes through marketplace lending platforms continues to grow. The Peer-to-Peer Finance Association (P2PFA) indicated that peer-to-peer lending increased in Q2 2017 compared to the same quarter a year ago.

use of external finance has stabilised. although Demand for new and RENewed loan and overdraft facilities remains weak compared to 2012

The SME Finance Monitor shows use of loans and overdrafts by SMEs has been fairly stable since 2014. In the first half of 2017, 38% of SMEs said they were currently using external finance, compared to 37% in each of the previous three years.

For those SMEs with employees, however, the number of businesses using external finance has increased. In the first half of the year 64% of small businesses (10-49 employees) said they currently use external finance, up from 59% in 2016. 74% of medium-sized businesses (50-249 employees) used external finance in H1 2017, compared to 64% in 2016.

Demand for new and renewed loan and overdraft facilities in the first half of 2017 has slightly declined compared to 2016, and is much lower than in 2012. The proportion of SMEs applying for new or renewed finance has fallen to 4% in H1 2017. This is lower than in 2012 (11%), when the SME Finance Monitor started, and 2016 (5%), (SME Finance Monitor, page 114).

Small business confidence fELL to one-year low in Q3 2017

Confidence, as measured by the FSB Small Business Index, fell to one-year low in Q3 2017. The FSB Small Business Index fell from +15.0 in Q2 2017 to +1.1 in Q3 2017. The decline in confidence is likely explained in part by the political uncertainty resulting from the election result in June. Confidence was falling even before the election result, however, which suggests that political uncertainty is not the sole cause for concern. Businesses are facing the twin pressures of a weakening domestic economy, as well as rising costs of doing business.