Challenger and specialist bank lending hit record high of £35.5bn in 2022

Latest data from the British Business Bank shows that lending to small firms by challenger and specialist banks hit a record high in 2022. 

The report shows that smaller banks lent £35.5bn to SMEs last year, giving challenger and specialist banks a 55% share of the market. This exceeds the 51% market share smaller lenders achieved in 2021. While the sector’s biggest banks – Barclays, Lloyds, HSBC, NatWest and Santander – have traditionally dominated smaller business lending, challengers such as TSB and Metro Bank and specialists like Shawbrook Bank and Paragon Bank have taken a growing share of business customers. Gross bank lending to smaller businesses reached £65.1bn in 2022, up from the £57.7bn seen in 2021.

Gross bank lending increased by 12.8% in 2022, however net lending fell by £8.5 billion in large part reflecting repayment of Covid loans.

The report reveals the smaller business asset finance market also reached a record level in 2022 with an increase in new business of 11% in 2022 to £22.1 billion. This was driven in part by some easing of supply chain shortages and by rising asset prices.

The data reports a considerable drop in the demand for external finance. In Q3 2022, only 33% of smaller businesses were using external finance compared to 44% the year prior. Gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures. In addition, survey findings show that success rates for those seeking loans fell sharply from 80% to 64% year on year³.

For the smaller business equity finance market specifically, investment activity has slowed considerably since Q3 2022. Recent years have seen larger equity deal sizes and increased company valuations but in recent months investors have re-evaluated their positions leading to smaller deals and lower valuations.

Louis Taylor, CEO, British Business Bank, said “Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options. There are promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation.”

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance. At the British Business Bank, we are committed to supporting these businesses as they seek to achieve sustainable growth, and in turn boost economic productivity, by improving their access to external finance.”

Simon Goldie, Director of Business Finance at the Finance & Leasing Association (FLA) said “The fact that SMEs are increasingly choosing to borrow from challenger and specialist lenders underlines the importance of having a broad spectrum of providers to ensure that much needed finance reaches all corners of the economy.”

“The report also revealed that the asset finance market saw record levels of new business in 2022. Leasing and hire purchase are popular products with SMEs – they make good business sense.”

“In the current economic conditions, firms may want to maintain some flexibility with their cash flow. Depending which sector they operate in, they may not want to buy an asset outright if they operate in a high tech industry where obsolescence is a factor or if they only need it for a few months at a time.”

“Because of the inherent flexibility of asset finance, it is all the more frustrating that the Super-Deduction does not include these options.”

“The FLA and seven other trade bodies have written to the Chancellor recommending that a new Green Super-Deduction replaces the existing programme when it comes to an end in March.”

“This would help to address an additional finding in the British Business Bank’s report – that Net Zero deals are concentrated in London. Net Zero is a national issue, and firms across the country need finance options that work with the grain of their business.”