Equity investment in smaller businesses doubled in 2021, finds latest British Business Bank research

  • Equity investment in smaller businesses surged 130% to £14bn in the first three quarters of 2021 relative to the same period in 2020 (£6.1bn) and on course to double compared to 2020
  • Bank lending returned to close to pre-pandemic levels, with 2021 lending down 45% from 2020
  • Almost half of smaller businesses see reducing their carbon emissions as a priority; over a fifth would use external finance to improve their environmental impact
  • Disparities in access to finance remain, with Ethnic Minority-led firms around twice as likely to cite access to finance as a barrier

Published today, the British Business Bank’s Small Business Finance Markets 2021/22 report highlights a surge in equity investment into smaller UK businesses last year. £14bn was invested over the first three quarters of 2021, a 130% increase on the £6.1bn invested over the first three quarters of 20201. With one quarter still to go, investment has already exceeded the £8.7bn invested in the whole of 2020. At the same time, the report shows that bank lending has returned to close to pre-pandemic levels, with 2021 lending down 45% from 2020, driven by lower drawdowns of government-supported loans.

Economic recovery

The report suggests there could be continued economic recovery throughout 2022, with strong demand expected for investment to fuel business growth. Although 2022 may still provide a challenging environment for some businesses, many others report that they are seeking to pivot towards growth, improve productivity and transition to a net zero economy.

Small business debt

The amount of debt held by smaller businesses has significantly increased compared to pre-pandemic levels due to businesses accessing the government’s Covid-19 emergency finance schemes. At their peak in March 2021, smaller business debt stocks were estimated to be 30% up. Encouragingly, however, debt repayments are becoming a smaller share of businesses cash flow as UK economic recovery helps boost their turnover. The proportion of small and medium sized businesses with debt repayments making up more than 50% of turnover has declined since early 2021. For businesses with between 100 and 249 employees, just 2.5% report debt repayments above 50% of turnover, down from a peak of around 5.5% in February last year.

As well as debt markets overall returning to near pre-pandemic levels, there are other indicators of a rebound in activity. Challenger and specialist banks accounted for just over half of the bank lending (51%) – a record share, up from 32% in 2020 – while private debt, asset finance, invoice finance & asset-based lending, and alternative finance all experienced rebounding levels of activity after a difficult 2020.

Catherine Lewis La Torre, CEO, British Business Bank, said: “As smaller businesses look to recovery and growth following a challenging economic period, finance will continue to play a crucial role. With our mission to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, the British Business Bank will continue to support the country’s smaller businesses by improving access and options to secure external finance.”

Small Business Minister Paul Scully said: “This report shows a massive 130% increase in equity investment into smaller UK businesses, which is a hugely positive step forward in our recovery from the pandemic.

“However there is clearly more to do to get ethnic minority and women-led businesses on to a level playing field when it comes to accessing finance. The Government will continue to work with the sector, including through Start Up Loans and the Rose Review of female entrepreneurship, to ensure everyone has the tools they need to succeed.”

Demand and supply-side factors contribute to geographic imbalances in access to finance

The data shows that both demand and supply-side factors are contributing to geographic imbalances in finance flows. Long-run data covering 2019 to mid-2021 show London businesses remain more open to using finance, with 37% happy to use finance to grow compared to 29%-32% of smaller businesses in most other parts of the UK.

While the UK hosts a large number of rapidly growing businesses, external finance remains highly concentrated in the capital compared to other regions. London firms attracted 70% of 2021 Q1-Q3 investment value. This is partly due to the geographic location of the equity investors themselves, which are predominantly based in the capital. This was also evidenced in the Bank’s first Regions and Nations Tracker, published in October 2021, which showed 82% of equity investment stakes in the UK are between investors and smaller businesses located within two hours of each other.  

Despite these inequalities, the British Business Bank’s regional funds programmes continue their success in delivering regional access to finance, with the Northern Powerhouse Investment Fund recently surpassing £300m direct investment, and the Midlands Engine Investment Fund reaching its £150m investment milestone.

Breaking down barriers in access to finance in the regions and Nations remains key to levelling up economic opportunity. That is why the British Business Bank remains committed to addressing regional disparities in access to external finance, and is reflected in the recent Spending Review, at which the Bank was provided with additional £1.6bn for new regional funds and a further £150m for regional angel investment. In 2021, the Bank’s core programmes are estimated to have deployed more than £979m of finance to businesses outside of London.

Almost half of smaller businesses view reducing carbon emissions as a priority

In 2021, almost half (47%) of smaller businesses viewed reducing their carbon emissions or environmental impact to be a priority for their business and one in five (22%) would use external finance to help transition their business to net zero. Just over one in 10 (11%) of smaller businesses have already used external finance to support net zero actions.

In contrast, almost three quarters of smaller businesses (71%) viewed maintaining or increasing sales to be a high priority, and almost two-fifths (37%) would be happy to use external finance to grow their business.

Research suggests equity investors are increasingly considering environmental factors in investment decisions. A survey of UK VC fund managers conducted by the British Business Bank indicated that the vast majority (83%) are now taking into account environmental factors within investment decision making, and more than half (52%) see ESG factors as a significant part of their investment decision making process. This has in turn led to an increase in clean tech investment in the market.

In 2021, the British Business Bank introduced a new climate change objective that commits it to supporting the UK’s transition to a net zero economy, alongside joining relevant initiatives such as the Race to Zero campaign and Business Ambition 1.5C.

Half of Ethnic Minority-led businesses are open to using finance for growth

The report also indicates that Ethnic Minority-led businesses are more open to using finance and more ambitious for business growth but access to finance remains an issue. Half (50%) of Ethnic Minority-led businesses are open to using finance for growth compared to a third (32%) of White-led businesses. More Ethnic Minority-led businesses (64%) have ambitions for significant growth compared to 39% White-led businesses.

Despite this, Ethnic Minority-led businesses are more likely to be discouraged from applying for external finance and having their application turned down, leading to negative impacts on their business. Although rejection rates have declined in recent quarters, most likely reflecting the impact of government-backed loan schemes, they remain significantly above those for White-led firms, with data showing that 18% of Ethnic Minority-led businesses were turned down for finance between Q3 2020 and Q2 2021, compared to only 10% of their White counterparts.

As a consequence, Ethnic Minority-led firms are around twice as likely to cite access to finance as a barrier (23%) than White-led businesses (12%). Additionally, most (56%) Ethnic Minority-led businesses currently using finance agreed they thought it would be difficult for them to obtain finance again, compared to 42% of White-led businesses.

Amongst female-led businesses, appetite for external finance has significantly increased to 31% in Q2 2020-Q2 2021, but remains lower than for male-led businesses at 39%. Female-led businesses are also more likely than male-led businesses to be discouraged from applying for finance, citing issues such as uncertainty over where to find finance and concern over the application process being too burdensome. Despite this, only 12% of female-led businesses view access to finance as a barrier, broadly in line with male-led businesses (13%).

The British Business Bank runs the Start Up Loans programme to help entrepreneurs from under-represented backgrounds start up and scale a business. Around 36,000 (40%) of loans have gone to female entrepreneurs and around 18,000 (21%) to entrepreneurs who belong to an Ethnic Minority group (excluding white minorities): almost 8,000 (9%) have gone to female entrepreneurs from Ethnic Minority backgrounds.

Download the infographic

View the report on the British Business Bank site

By UKBAA 01 Mar 2022