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 finance markets for smaller UK businesses.
This is a summary of key findings and conclusions from the 2024 report in which we examine how small business finance markets have evolved over the last decade (2014-2023) since the Bank published its first Small Business Finance Markets report in 2014. The Bank will be celebrating its 10th anniversary in November 2024. View the full report (PDF, 4MB).
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 finance that is right for their needs at the right time.
Snapshot summary
- The UK economy has experienced several economic shocks over the last decade, but finance providers together with government support have helped smaller businesses.
- The smaller business lending landscape has changed substantially over the last decade with a greater range of debt finance providers than ever before.
- UK equity finance markets have matured over the last decade, becoming deeper with a greater range of investors able to support more companies at all stages of their development.
- There remain regional and place based challenges in getting finance to many parts of the UK, particularly equity finance.
- There continues to be a gap in the proportion of finance going to female and Ethnic Minority businesses, but recent initiatives are beginning to raise awareness of the issues.
- Looking forward, the Bank has identified four key issues that are likely to shape small business finance markets over the next decade. This includes funding the transition to net zero, finance providers making greater use of digital technology and artificial intelligence (AI), the return to more ‘normal’ interest rates and the need to create a dynamic and resilient economy.
Key findings
1. The UK economy has experienced several economic shocks over the last decade, but finance providers together with government support have helped smaller businesses.
- Interest rates were held at ultra-low levels for the majority of the past decade, with UK smaller businesses facing unprecedented supply side shocks (Brexit, Covid-19, Russian invasion of Ukraine and supply chain disruption raising the level of inflation in the latter part of the decade).
- Post-Global Finance Crisis (GFC), UK small business finance markets evolved with more providers and diverse finance options, deepening and better supporting businesses. During the pandemic, these markets sustained the economy through the Bank’s Covid loan schemes (e.g. Bounce Back Loan Scheme) and the equity-based Future Fund scheme, preventing cash shortages.
- Finance markets have a fundamental role in funding new innovations and supporting business investment. This is critical for helping to address the UK’s long term structural issues of low business investment and productivity.
- The use of external finance by small businesses saw a consistent rise in 2023, growing from 41% in Q1 to 50% in Q3, with greater reliance on credit cards (use is up from 12% of smaller businesses in Q1 to 20% in Q3) and overdraft finance (up from 11% in Q1 to 17% in Q3) as business cashflows come under pressure.
- Asset finance grew for the third year in a row, up to 26% higher in 2023 in real terms compared to 2014.
- Interest rates returning to more historically normal levels pose challenges for smaller businesses, with increased finance costs impacting on business cashflows and upward pressure on finance default rates.
2. The smaller business lending landscape has changed substantially over the last decade with a greater range of debt finance providers than ever before.
- Over the last decade, the lending landscape underwent considerable changes, with60 new banking licenses granted since 2014, 36 of which served small businesses.
- In 2014, the five largest banks provided 63% of lending, but their share decreased to 41% by 2023.
- Challenger banks collectively surpassed the big five banks’ market share after 2021 indicating increased diversification.
- Non-bank lenders, peer-to-peer lending and platforms, and private debt funds also played a pivotal role in filling markets exited by traditional lenders.
- The result was a deeper and more resilient finance market that facilitated funding for a diverse range of smaller businesses with varying financial needs.
- The total stock of bank lending in 2023 was£185bn, falling by 12% in real terms compared to 2022.
- The flow of bank lending fell to £59.2bn in 2023 with gross lending 15% lower in real terms compared to 2022.
- The decline in 2023 reflects higher borrowing costs and economic uncertainty weighing on the demand for lending. Banks were also more cautious about the ability of businesses to repay.
3. UK equity finance markets have matured over the last decade, becoming deeper with a greater range of investors able to support companies at all stages of their development.
- The UK equity finance market witnessed a47% increase in deal numbers and a remarkable 265% increase in investment from 2014-16 to 2021-23.
- Smaller businesses raised £6.5bn of equity finance over the first three quarters of 2023, 53% less than during the same period in 2022. After two exceptional years, this brings such investment to around the level it was in 2020, still the fourth-highest year on record.
- Follow-on deals dominated the market in 2023, constituting56%, up from 32% in 2014.
- The UK has established its position as a global leader in VC, being the third largest VC market in the world. The UK has strengthened this position compared to ten years ago. The UK’s share of global VC investment value has risen from4% in 2014-16 to 5.9% in 2021-23.
- Whilst the UK has established itself as a globally leading VC market, particularly in sectors such as fintech and software, gaps also remain in funding R&D intensive sectors. UK VC investment in R&D intensive sectors represented26% of GDP in 2019-21, compared to 0.44% in the US, a difference of 1.7 times.
4. There remain regional and place based challenges in getting finance to many parts of the UK, particularly equity finance.
- Regional challenges persist in securing finance, especially for equity, across the UK.
- Despite external debt finance largely aligning with smaller business populations outside London, regional differences in demand also remain.
- Specific areas, like rural and coastal towns, and socio-economic characteristics, such as high deprivation, experience localised funding gaps.
- London’s dominance in equity finance has grown, receiving 46% of deals and 58% of total investment by Q1-Q3 2023.
- Despite equity ecosystems expanding over the decade, growth in investor presence, particularly in venture capital offices, is most pronounced in London (186% compared to 142% in 2017), emphasising regional imbalances.
- Alongside the evidence we present below on access to finance by social group, this shows there is more work to be done in unlocking the potential to drive growth in hard-to-reach groups and areas
5. There continues to be a gap in the proportion of finance going to female and Ethnic Minority businesses, but recent initiatives are beginning to raise awareness of the issues.
- Little change in finance distribution to female and Ethnic Minority businesses, despite recent awareness initiatives. The share of equity investment going to all female founder teams has remained static over the decade at just 3%.
- Challenges persist for these businesses in raising finance including discouragement, lack of awareness, and perceived rejection.
- Limited data on funding for these businesses hampers progress measurement, but there are signs of improvement in equity deals to female founders. Investing in Women Code (IWC) signatories (that have consistently reported data over 2020-22) have increased their share of funding to female founders from 32% in 2020 to 38% in 2022.
- Community Development Financial Institutions (CDFIs) play a significant role in supporting lending to female and Ethnic Minority-led businesses. In 2022, 15% of CDFIs business lending went to Ethnic Minority-led businesses and 36% went to women-led businesses. This was above the share of the business population those groups account for.
- The collection and reporting of data initiatives on gender, ethnicity, and broader characteristics such as the IWC have increased transparency and accountability, ensuring insights influence lending and investment decisions and fostering inclusivity and equitable economic gains.
6. The Bank has identified four key issues for smaller business finance markets over the next decade.
Having examined how finance markets have changed over the last decade, the Bank has identified four key issues that are likely to shape SME finance markets over the next decade and beyond.
- Smaller businesses contribute a sizeable share of the UK’s Green House Gas (GHG) emissions, but face difficulties transitioning to net zero. Over the next decade, finance markets will have a critical role in funding new innovations and smaller businesses adoption of cleaner technologies, supporting the smaller business transition to net zero. The British Business Bank will work alongside finance providers and the Government to create a modern green economy.
- Artificial intelligence (AI) has the potential to shape SME finance markets over the next decade. Finance providers are already using predictive AI but generative AI is creating new opportunities, with fintech and new entrants leading the way in its adoption. Going forward AI could help increase the availability and lower the cost of finance to SMEs helping to address some of the existing finance market challenges outlined earlier. The British Business Bank is helping to support the development of fintech and finance providers using new technologies and delivery models.
- Interest rates are unlikely to return to the ultra-low levels seen in much of the last decade in the short-to-medium term. Finance markets have already begun to accommodate the new higher interest rate environment, but smaller businesses will need to adapt after the decade of ultra-low interest rates. This will put pressure on small business investment and survival in the short-to-medium term. The British Business Bank aims to continue to drive sustainable growth by ensuring businesses can access the right type of finance they need to start, grow and thrive. It will do this by ensuring there are a range of finance solutions available in the market tailored to meet business needs.
- Recent economic conditions have resulted in rising small business closures. Whilst this creates disruption in the short run, this could result in a more dynamic economy if resources are freed up to be redeployed in new productive uses. The creation of new and innovative businesses will help the UK economy to become more resilient to future shocks and disruption and take advantage of new opportunities in the market. The Bank’s Start Up Loans and early-stage equity interventions remain targeted at supporting the new start-up companies that are vital to the UK economy.