Challenger and specialist bank lending is high but proportion of smaller businesses accessing finance remains low, finds report
The British Business Bank’s Small Business Finance Markets 2024/25 report, published on 4thMarch, has found that challenger and specialist banks’ share of gross lending is the highest on record – accounting for 60% and outperforming the UK’s big five banks.
The report also found that business investment by smaller businesses continued to be low, a key reason for the lag in UK productivity versus other G7 countries.
In the South West, use of finance was down five percentage points between the second half of 2023 and the first half of 2024, reflecting the overall trend. However, the share of smaller businesses that remain willing to pursue external finance for growth showed a smaller decline.
Credit card use in the South West was among the highest in the UK and the only region that did not show a reduction.
The South West has the highest rate of employment in small businesses in England, the report says. Small businesses in the region with 1-49 employees provide more employment than large businesses but are also potentially more vulnerable to increasing costs and macroeconomic conditions.
The report adds that small businesses in highly deprived parts of the South West were the least ambitious in the UK to grow significantly, and just over one in five in these areas were happy to use external finance to grow, the lowest proportion in England, and similar to Wales.
Challenger and specialist banks continue to outperform the bigger traditional banks
Of the £62.1bn of gross lending to smaller businesses in 2024, £37.3bn was provided by challenger and specialist banks. Their share of gross lending (60%) exceeded that of the big five UK banks for the fourth year in a row, up from 59% in 2023 and the highest on record.
Business investment by smaller businesses remains low
The proportion of smaller businesses accessing finance fell from 50% in Q3 of 2023 to 41% in Q2 of 2024, most likely due to business confidence remaining low despite some recent economic growth. This reflects a challenging economic environment in the UK – 2024 saw growth in the UK at 0.9%, but the GDP level was only 3.2% above the pre-pandemic level in 2019 (the second lowest in the G7). The report also finds that smaller businesses generally invest less than larger businesses relative to their turnover. In 2024, smaller businesses invested an estimated £12.3bn, while larger businesses invested 2.25 times as much (£27.7bn), despite larger businesses contributing slightly less turnover to the economy (48%) than smaller businesses (52%).
Reasons for this lower level of investment include a general lack of capital, and investors having less information and certainty about smaller businesses, which leads to higher borrowing costs.
Investment in the UK has also been low historically, with investment growth slower post-global financial crisis. This is a key reason for the country’s productivity lag compared to, for example, Germany and France.
High cost of credit and risk aversion key factors behind the lack of investment for smaller businesses
The report finds that smaller businesses who believed they have underinvested most commonly cited ‘credit being too expensive’ (58%), or that they ‘could not borrow at a reasonable rate’ (55%) as key factors for not investing in their business.
77% agreed that they would accept a slower growth rate rather than borrowing to grow, with only 7% disagreeing, suggesting a strong aversion to taking on debt for investment.
Steve Conibear, UK Network Director South West at the British Business Bank, said, “It is clear that conditions are not easy for the South West’s smaller businesses which has clearly impacted investment decisions. For example, we’ve seen external finance used to fund short-term debt for working capital, rather than investment for longer-term growth.
“If we want to see the region thrive we must keep championing sustainable business investment as a key driver of economic growth, job creation and productivity so wages and living standards improve.
“The findings from this report highlight the importance of ensuring smaller businesses in the South West have access to the diversity of finance they need to grow and succeed. Through our programmes, including Start Up Loans and the £200m South West Investment Fund, we will continue to provide them with the capital they need to start, scale and reach their full potential.”
To view the full report, click here.
Pictured: (top of page) Image by Ahmad Ardity from Pixabay
