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Bank lending to small businesses in southeast England has recovered strongly, with the rest of the UK lagging behind, research from British Business Bank shows.
The jump in the South East helped the rate for approvals across the country to rise 21 per cent in the first half of the year compared with the same period last year, entering positive territory for the first time since the pandemic, the data suggested.
The major banks had begun approving more loans and overdrafts for businesses in the region last year, with rates rising 10 per cent in 2023. This rise contrasted with a 9 per cent fall in approvals for the whole of the UK last year, including sharp falls in the North East and Wales.
“The slow recovery of core debt market activity seems to be driven not only by subdued demand from smaller businesses, but also greater caution from lenders,” the report stated.
Louis Taylor, the bank’s chief executive, said: “To the extent that there is an increase in the provision of bank finance to small businesses, credit card growth is the largest, overdrafts as well, and also leasing [asset finance]which has seen an almost post-Covid boom.”
He said it was unclear why more small business owners were dipping into their credit cards. It could be simply to meet short-term financing needs or because they could not access the finance in other ways.
The picture of a patchy revival in financing was echoed in the recovery of equity investment, the bank highlighted. The value of venture capital investment in small companies based in London in the first half of 2024 returned to levels last seen in the third quarter of 2022, whereas the value of investment secured by companies in the rest of the UK remained at subdued levels.
The British Business Bank is the government’s economic development agency. Its annual tracker of the prevalence of external finance by businesses across the UK found that usage rose last year by ten percentage points to 46 per cent from post Covid-era lows. The rise was driven by a strong increase in the use of credit cards, with demand for bank loans declining.
The bank has encouraged diversification in the sources of finance open to businesses since it was set up in 2014. Last year, 59 per cent of debt funding for small and medium businesses (SMEs) came from new lenders such as Starling Bank, Funding Circle and Thin Cats. In contrast, Barclays, NatWest, Lloyds, HSBC and Santander had provided more than 90 per cent of all new lending to SMEs in 2009.
Taylor said the wide range of finance partners gave small businesses options, but acknowledged that finding the right one had become more “complex”. “Companies will have multiple relationships for different things. They will have some transactional banking relationships, others for things like foreign exchange. It is a more complex picture for SMEs and we are doing what we can to guide them.”
When businesses were asked if they were confident about using external finance to help their businesses grow, only 33 per cent said they were, marginally up from 31 per cent that said so in 2022. The majority of small businesses described themselves as happily trading from their own resources (72 per cent compared with 77 per cent in 2022).
Businesses based in the East of England made the lowest use of external finance, at 41 per cent, with take-up remaining unchanged on the year before. Those in Wales were most likely to use finance, at more than half of businesses.
Those in northeast England have seen some of the most dramatic changes in the availability of finance. Having enjoyed the highest concentration of bank loans relative to the number of businesses during the Covid period, as well as a high rate of external finance use, new loan and overdraft approvals fell 37 per cent in 2023, having also fallen in 2022. In the first half of this year, the North East was the only region to record a continued decline in the volume and value of loans and overdrafts, down a further 24 per cent and 5 per cent respectively. The North East is home to finance-reliant sectors such as manufacturing and agriculture, the bank noted.
Taylor said Britain’s banking system was serving businesses well. “The banks are being supportive. There is still quite suppressed demand. Were demand to spike it is not really clear whether there is risk appetite among the banks to meet that demand. So we have a relative equilibrium at the moment,” he said.
The British Business Bank marks its tenth year in operation in the middle of November. Rachel Reeves, the chancellor, announced this week that the bank’s £7.9 billion of equity and debt growth capital funding of small businesses and scale-ups would be put on a permanent footing, removing the risk that the funding could be taken away.
The decision covers the large nations and regions venture funds, such as the £660 million Northern Powerhouse Fund. These co-invest alongside private-sector parties, and in the year to the end of March, invested £246 million into more than 200 companies.
“It is a significant moment,” said Taylor. “That money has historically been single-shot. We invest it, we get it back and it goes to the Treasury. Now we get to keep it and reinvest it. As the owner, the government has the ability to call for dividends, but fundamentally, the idea is to create a permanence to the bank that it hasn’t really had before.
“It allows us to be a more credible investor in earlier stage companies, where they know we have the money to go later stage with them.”
Taylor said the bank would also have more flexibility in how it used the money. “Where previously that £7.9 billion was broken up into very hypothecated pots for different programmes, we will get more flexibility to allocate where it is needed. We will be more responsive to what the market needs.
“We now have £7.9 billion of commercially focused capital that has a consistent risk appetite through the economic cycle. We will continue to write cheques into [venture] funds to cornerstone them, and encourage others in, without compromising our underwriting standards.”