Smaller business asset finance new deals reach a record high of £23.5bn in 2023, but other indicators down, finds latest British Business Bank research

  • Asset finance new deals up by 7% in 2023 to £23.5bn, the third yearly increase in a row and the highest level on record
  • Use of finance up from 41% of smaller businesses in first quarter to 50% in third quarter of 2023
  • Credit card and overdraft finance use up as business cashflows come under pressure
  • Bank lending fell to £59.2bn, down 9% in nominal terms
  • Challenger and specialist banks account for 59% of total gross lending in 2023, exceeding the big 5 banks for the third consecutive year
  • Equity investment although declining to levels last seen in 2020, is still high by historic standards
  • UK business population up in 2023 for the first time since the start of the pandemic driven by rise in unregistered businesses

The British Business Bank’s Small Business Finance Markets 2023/24 report, publishing next week, finds that asset finance grew for the third year in a row, increasing 7% in 2023 to £23.5bn, the highest level on record. This increase follows a rise of 11% in 2022 and 23% in 2021 and highlights the continued rebound in the asset class as supply chain pressures have eased and smaller businesses ¹ have looked to replace ageing vehicles and machinery.

Smaller business use of finance increases in 2023

The use of external finance by smaller businesses saw a consistent rise over the year, growing from 41% in Q1 to 50% in Q3. The rate of this increase indicates a growing need for finance to support cash flows, with a greater reliance on credit card (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). Working capital was the main reason for seeking finance for 58% of smaller businesses in 2023, up from 53% the year before.

Bank lending down

The total stock of bank lending in 2023 was £185bn, falling by 12% in real terms compared to 2022. Gross bank lending to smaller businesses was £59.2bn in 2023, 9% lower than 2022, but remains the third joint highest, on par with 2016. 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.

Challenger and specialist banks share of lending up

For the third consecutive year, challenger and specialist banks account for a higher share (59%) of total gross lending than the big five banks (41%).

The lending landscape has changed considerably since 2014, with the report revealing that 60 new banking licences have been granted in the last decade, with 36 being issued to providers serving smaller businesses. Non-bank lenders have addressed specific, underserved segments of the market with growth in lending from private debt funds, peer-to-peer lending and invoice and asset-based finance.

Equity investment declines to 2020 levels

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. While there was a sharp decline in activity in the second half of 2022, investment now appears to be stabilising at around £2bn per quarter in 2023.

Later stages of the UK equity finance market have continued to experience the largest reductions in investment. Growth-stage investment in the first three quarters of 2023 was £2.4bn, 65% lower than the same period in 2022. Venture and seed stage investment fell by 43% and 31% in 2023, respectively.

The growth stage was the main driver of market expansion over 2021 and the first half of 2022, and subsequently has also experienced the largest drop in both percentage and absolute terms since market conditions have worsened from the second half of 2022 onwards.

UK equity finance has matured over the last decade, becoming deeper and with a greater range of investors able to support companies at all stages of their development. The report finds that regional and place-based challenges remain in getting finance to many parts of the UK, however – particularly equity finance to rural, deprived or coastal areas.

Louis Taylor, CEO, British Business Bank, said:

“This year’s report sees a continuing increase in businesses seeking alternative finance options, evidenced by further growth from challenger and specialist banks, and asset finance providers. This is indicative of a persisting trend of finance markets offering a wider range of finance to smaller businesses with diverse finance needs.

Although equity investment fell last year to levels last seen immediately prior to the pandemic, it is still healthy by historic standards. While there was a decline in activity in the second half of 2022, it is positive to note that investment appears to have stabilised in 2023, and at a relatively high level when looked at over the longer term.”

Greater use of digital technology and AI will shape access to finance

Developments in AI are continuing at a rapid pace, and these advances will have a profound impact on small business finance markets in the coming years. The British Business Bank reports a steady increase in usage over the past decade, with most UK financial organisations now using predictive AI. More than 70% of UK Finance members surveyed have generative AI at the proof of concept or pilot phase, with FinTech and new entrants leading the way.

Finance markets will be key in the transition to net zero

Finance markets have a critical role in funding innovation and the adoption of new cleaner technologies. The transition required to meet the UK’s net zero objectives will require significant investment across all areas of the economy. It is estimated that an additional £50bn-£60bn of capital investment per year will be required through the late 2020s and 2030s to meet the UK’s net zero commitments, with private sector investment forming the majority of this. If the UK is to meet its net zero targets by 2050, smaller businesses must be part of the solution but they face many challenges in this transition. This includes access to finance, which is a major block for 28% of the smaller businesses prioritising environmental sustainability over the next 12 months.

Increase in UK small business population

There were an estimated 5.6 million UK private sector smaller businesses at the start of 2023. The UK business population increased in 2023, for the first time since the start of the pandemic, driven by increased numbers of unregistered businesses. However, the number of registered business closures continues to exceed the number of business start ups, leading to a fall in the registered business population.

There were 3% more unregistered (sole trader) zero employee firms compared to the previous year. In contrast, zero employee registered firms and small and medium sized employers (1–249 employees) showed a net decrease to the start of 2023 by 2.5% and 0.1% respectively. Therefore, the increase in the business population between 2022 and 2023 was driven by unregistered businesses, the largest category of UK businesses.

Download the Small Business Finance Markets report 2024

By UKBAA 14 Mar 2024