Published today, the British Business Bank’s 2019 Small Business Finance Markets report finds that some businesses expect an impact from Brexit, but many remain optimistic about growth.
An increasing proportion of smaller businesses expect Brexit to have a negative impact on their business (29%, up from 22% in 2017). Over one in three (34%) expect access to finance to become more difficult after departure, with only 3% expecting finding finance to become easier.
Overall, the demand for external finance has continued to fall, with just 36% of smaller businesses using external finance in 2018 (versus 44% in 2012). Despite these concerns, however, just over half (50.4%) still aspire to grow over the next 12 months.
Evidence in the report suggests a shift in behaviour amongst some smaller businesses. Some are delaying longer term investment and expansion decisions ahead of Brexit and reducing their demand for external finance, while others appear to be using external finance to put in place shorter term contingency plans.
Keith Morgan, British Business Bank CEO, said: “It is clear that a lack of confidence is affecting many smaller businesses, as evidenced by a continuing drop in demand for external finance. It is, however, encouraging to see that half still aspire to grow and that there’s increased awareness of a broader range of finance options. This will be an important factor in ensuring that smaller businesses are better placed to make the right finance choices as uncertainty diminishes and confidence returns.”
Stock of bank lending continues recent decline in real terms; alternative finance advances, but at a slower rate
Bank lending stock (£166bn) was similar to 2017 (£165bn) but this continues a decline in real terms over recent years. Gross bank lending – which makes up the biggest proportion of business finance - averaged £14.4bn per quarter. Repayments, however, were at virtually the same level - £14.3bn per quarter - meaning that net lending over the year was positive, but only by a small amount.
The growth of alternatives to bank finance has continued, albeit at a slower pace compared to 2017. Asset finance grew just 3% in 2018, compared to 10% in 2017 and peer-to-peer business lending by 18%, compared to 51% growth in 2017. While equity finance flows were up 4% (compared with a 79% rise in the previous year), the number of equity deals fell by 6%, with the rise in value being driven by larger deal sizes.
There have been signs of improvement in the UK’s equity ecosystem. There is increased funding of university spinouts – often in successful ‘clusters’ in high-tech sectors, including those identified as Grand Challenges in the government’s modern Industrial Strategy.
There is still room, however, for considerable improvement in the supply of patient capital to finance businesses with high growth potential. Despite the increase in equity finance as a proportion of GDP in recent years, the UK remains well behind the US, and there are specific challenges around the funding of businesses with female founders.
Following the Patient Capital Review, the British Business Bank has taken measures to address these issues and increase the supply of patient capital, including British Patient Capital, a new £2.5bn programme to enable more long-term investment in high growth potential UK companies.
Awareness of finance options is rising
Awareness of finance options outside of traditional lending continued to grow in 2018:
• 52% of smaller businesses aware of P2P (up from 47% in 2017)
• 70% are aware of crowdfunding platforms (up from 60% in 2017)
• 69% aware of VC (62% in 2017)
Big differences in the use of finance options between, and within, UK regions
The report examines smaller business finance in unprecedented depth, going beyond the regional picture to examine trends at a local level. Key findings include:
• Equity deals remain concentrated in London (48% - although only around a fifth of High Growth Businesses are in the Capital), and around tech clusters elsewhere, such as Manchester and Edinburgh.
• Clusters mask stark differences in equity deals numbers at sub-regional level – almost half (45%) of Local Authority Districts had zero equity deals in 2018. A further 24% only had one deal.
• Wide variation in London between local authorities – from 77 equity deals in Westminster to just one in Waltham Forest
• EIS and SEIS deals are concentrated (47%) in London and South East, and over half (57%) of Angels located in London
Addressing regional imbalances and stimulating demand
The British Business Bank has put in place a series of measures to address many of the issues identified in this year’s Small Business Finance Markets Report:
• A new UK Network – aimed at improving local and regional business finance ecosystems.
• The Finance Hub – which provides independent and impartial information on the finance options available for scale-up, high growth and potential high growth businesses.
• A third regional fund – the Cornwall & the Isles of Scilly Investment Fund (CIOSIF), in addition to the Northern Powerhouse Investment Fund (NPIF) and Midlands Engine Investment Fund (MEIF)
• A £100m Regional Angels Programme to support early-stage equity finance, especially in areas of the UK that are currently underserved.