British Business Bank’s Small Business Finance Markets 2019/20 report has highlighted a significant long-term growth in alternative finance volumes over the last five years, with a 32% increase in asset finance, a 131% increase in equity finance and a 374% increase in marketplace business lending.

The British Business Bank was set up in 2014, with objectives including increasing the supply of finance to smaller businesses where markets don’t work well and helping to create a more diverse finance market.

Five years on, its latest report finds increased diversity across the smaller business finance market with the establishment of a range of new providers, products and platforms contributing to growth in the overall volume of funding accessed. More than half (52%) of smaller businesses that sought finance in 2019 contacted a finance provider outside of the ‘Big Five’ banks.

Over the same five-year period, gross lending to smaller businesses by the major banks has remained largely flat, with real term growth of just 1.2%. Gross bank lending was at £56.7bn last year, compared to £53bn in 2014.

Although London still dominates, there are encouraging signs that the regions outside the capital are making upward progress:

  • Manchester, Edinburgh and Cambridge are in the top 10 local authority districts for number of equity deals over 2019
  • Yorkshire and the Humber looks likely to see a record number of new companies raising seed equity funds in 2019
  • Between 2014 and 2018 the proportion of British Business Bank-supported equity deals outside of London rose from 44% to 57%
  • In 2018 its Northern Powerhouse Investment Fund and Midlands Engine Investment Fund accounted for 16% and 20% of the equity deals in their respective regions.

The Bank has put in place further measures to address some of the regional and other issues identified. These include a third regional fund – the Cornwall & the Isles of Scilly Investment Fund (CIOSIF) – and a Regional Angels Programme to support early-stage equity finance, especially in areas of the UK that are currently underserved.

Despite these measures, there remains more work to do to ‘level up’ the regions. Although debt finance remains evenly spread across the UK and is closely aligned with the size of the local business population, equity finance continues to be concentrated in London (accounting for 47% of deals and 66% of investment value in 2019).

Keith Morgan, British Business Bank CEO, said  “When it comes to external finance, smaller businesses have never had a wider choice of products and providers available to them. It’s really encouraging to see significant growth in the volume of funding for businesses that are looking to finance their growth ambitions.”

“Although use of the many finance options available has significantly improved, disparities between UK regions remain. The Bank will continue its work to support regional and local entrepreneurial ecosystems so that smaller businesses can thrive wherever they are.”

Business Minister Paul Scully said “Finance for small businesses is essential to our goal of making the UK the best place in the world to start and grow a business. This report will shape our support for business leaders across the country, so they can drive innovation and growth.”

Further findings in the report found a low demand for finance products is long-standing, despite a flurry in 2019 related to EU Exit:

  • Demand for external finance among small businesses has remained stubbornly flat. In 2016, just over 70% would accept slower growth rather than take on external finance. This remained at a similar level (73%) in 2019.
  • Although more than half (56%) of smaller businesses surveyed expected the UK’s exit from the EU to have no impact on their growth, 29% of those surveyed expected Brexit to impact their business negatively.
  • Evidence suggests a slight increase in demand for finance last year, but this appears to have been for short-term finance for EU Exit preparations, with use of overdrafts (23% of businesses) and credit cards (19%) rising to their highest level since 2012.
  • Just 28% of businesses expect to grow over the next 12 months (down from 36% in 2018)

In response, the Bank is rolling out a range of initiatives focused on encouraging businesses to explore their growth opportunities, informing them about their finance choices, and enabling them to find the finance best suited to their needs.