SME lending fell in first quarter, although demand for finance is showing signs of recovery

UK Finance today releases its latest Business Finance Review which reports on the finance needs of small and medium-sized enterprises (SMEs) in the first quarter of 2023.

Gross lending

The weak levels of demand for finance from SMEs seen at the end of 2022 contributed to gross lending across the seven lenders in our sample being £3.7bn in the first quarter of 2023.

There were regional variations – the largest falls were in the south west and Scotland, whereas the south east (excluding London) saw the biggest increase in lending, rising more than seven per cent quarter-on-quarter.

Applications 

In the first quarter we saw a rebound in applications for both loans and overdrafts, with banks reporting quarter-on-quarter growth of 20% and 11% respectively. These increases may indicate that SME demand for finance is turning a corner.

As well as an increase in applications, we saw an increase in loan and overdraft approvals in contrast to the falls at the end of 2022.

Number of approved loans and overdrafts by sector

Invoice finance and asset-based lending

Invoice finance and asset-based lending (IF/ABL) advances increased sharply in 2022, although in the first quarter the rate of advances increased at a slower rate (an annual increase of eight per cent to £21bn). While this is the slowest rate of growth since mid-2021, growth here has been stronger than other forms of finance since the end of government-backed loan schemes in 2021.

Taken together with the recovery in demand for overdrafts, the continued robustness in supply of IF/ABL products continues to point to the important role that specialist working capital finance is playing in supporting SMEs.

Financial headroom  

The financial resources available to SMEs remained stable – both overdraft utilisation rates and available deposits are largely unchanged at the start of 2023.

David Raw, managing director of Commercial Finance, said:  “The economy and SMEs have demonstrated resilience in the face of more challenging trading conditions and significant cost pressures, obstacles that we expect to ease gradually over the course of this year.

“Against this challenging backdrop, demand for finance has showed some early signs of recovery, although this has not yet fed through into the gross lending figures which showed another decline in the first quarter. Muted investment intentions and recent rises in interest rates will also act as a drag on demand for finance. SMEs continue to have some flexibility within existing facilities and deposits, which will support many through another bumpy year.”