Challenger and specialist bank lending reached record high of £35.5bn in 2022, finds latest British Business Bank research

• Gross bank lending to smaller businesses in 2022 was £65.1 billion, a 12.8% increase from 2021

• Record year for challenger and specialist banks, who lent £35.5 billion, exceeding lending by the major UK banks

• Significant drop in the proportion of smaller businesses using external finance – 33% versus 44% in 2021, but gross bank lending still up due to larger average loan sizes

• Rapid growth in equity investment in green innovation with net zero deal numbers outperforming the wider equity market

Published today, the British Business Bank’s Small Business Finance Markets 2022/23 report shows £35.5 billion of bank lending came from challenger and specialist banks in 2022. This exceeded lending by the major banks during the period, giving challenger and specialist banks a 55% share of the market

Gross bank lending increased by 12.8% in 2022, however net lending fell by £8.5 billion in large part reflecting repayment of Covid loans.

The report reveals the smaller business asset finance market also reached a record level in 2022 with an increase in new business of 11% in 2022 to £22.1 billion. This was driven in part by some easing of supply chain shortages and by rising asset prices.

Demand for smaller business finance is down

The data reports a considerable drop in the demand for external finance. In Q3 2022, only 33% of smaller businesses were using external finance compared to 44% the year prior. Gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures. In addition, survey findings show that success rates for those seeking loans fell sharply from 80% to 64% year on year. ^{Read footnote text 3}

For the smaller business equity finance market specifically, investment activity has slowed considerably since Q3 2022. Recent years have seen larger equity deal sizes and increased company valuations but in recent months investors have re-evaluated their positions leading to smaller deals and lower valuations.

Net zero deal numbers outperforming the wider equity market

Data shows that equity finance markets are adapting to growing demand for investment in green innovation with net zero deals outperforming the wider equity market. These deals currently make up 12% of all smaller business equity deals compared to only 5% in 2018, and deal values are rising even faster. Investment value of net zero-related deals rose by 184% over the past year, soaring to a new record level of £1.7 billion.

The majority of net-zero related deals are currently concentrated in London, accounting for 36% of UK deals and a third of the investment value. Outside of the capital, the South East of England and Scotland account for a greater share of net-zero-related deal count or investment value than their share of UK

turnover from low-carbon sector businesses. All other Nations and regions have a lower share by comparison.

The British Business Bank is committed to financing ground-breaking solutions to climate change to help smaller businesses transition to net zero. By breaking down barriers it will enable more entrepreneurs and business owners to contribute to the goal of a net zero economy by 2050.

Innovation required to boost productivity and economic growth

The report reinforces the importance of innovation in order to scale up UK productivity rates and encourage economic growth in a challenging macro-economic climate. The UK is ranked second in the G7 for our innovation environment by the Global Innovation Index, but the UK’s ranks fifth in the G7 nations in terms of the proportion of its smaller businesses that are innovative. The UK would require around 440k more innovative smaller businesses to meet the G7 average.

Innovative businesses are more likely to use some form of external finance (65% vs 58% of non-innovators). Smaller businesses seeking finance to innovate are also reported to be using a wide range of finance products, with many smaller businesses opting for grant finance, asset finance or bank overdrafts to help them develop and adopt innovative products and processes.

However, availability of finance (9%) and the cost of finance (8%) are identified as significant barriers to innovation.

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  Surveys were carried out in Q4 2021 and Q4 2022, with respondents being asked about success over the previous three years. The fall was partly due to the closure of the Bounce Back Loan scheme, which had enabled a greater success rate for applications during its operation. The bases differ in capturing government-backed/non-government-backed finance