Net lending to SMEs shrank to £500m last year, compared with £700m in 2017, according to a new report by the British Business Bank. The study also reveals a dramatic slowdown in the growth of alternative forms of funding, including peer-to-peer lending and asset finance. Lending through peer-to-peer platforms rose by 18% last year, compared with 51% in 2017. More than a third of small businesses said they expected Brexit to make it more difficult to access finance, although half said they still expected to grow in the next 12 months.

Net lending to SMEs shrank to £500m last year, compared with £700m in 2017, according to a report by the British Business Bank. The study also reveals a dramatic slowdown in the growth of alternative forms of funding, including peer-to-peer lending and asset finance. Lending through peer-to-peer platforms rose by 18% last year, compared with 51% in 2017. More than a third of small businesses said they expected Brexit to make it more difficult to access finance, although half said they still expected to grow in the next 12 months.

The British Business Bank’s 2019 Small Business Finance Markets report finds that some businesses expect an impact from Brexit, but many remain optimistic about growth. An increasing proportion of smaller businesses expect Brexit to have a negative impact on their business (29%, up from 22% in 2017). Over one in three (34%) expect access to finance to become more difficult after departure, with only 3% expecting finding finance to become easier.

Overall, the demand for external finance has continued to fall, with just 36% of smaller businesses using external finance in 2018 (versus 44% in 2012). Despite these concerns, however, just over half (50.4%) still aspire to grow over the next 12 months.

Evidence in the report suggests a shift in behaviour amongst some smaller businesses. Some are delaying longer-term investment and expansion decisions ahead of Brexit and reducing their demand for external finance, while others appear to be using external finance to put in place shorter term contingency plans.

Keith Morgan, British Business Bank CEO, said “It is clear that a lack of confidence is affecting many smaller businesses, as evidenced by a continuing drop in demand for external finance. It is, however, encouraging to see that half still aspire to grow and that there’s increased awareness of a broader range of finance options. This will be an important factor in ensuring that smaller businesses are better placed to make the right finance choices as uncertainty diminishes and confidence returns.”

The growth of alternatives to bank finance has continued, albeit at a slower pace compared to 2017. Asset finance grew just 3% in 2018, compared to 10% in 2017 and peer-to-peer business lending by 18%, compared to 51% growth in 2017. While equity finance flows were up 4% (compared with a 79% rise in the previous year), the number of equity deals fell by 6%, with the rise in value being driven by larger deal sizes.

There have been signs of improvement in the UK’s equity ecosystem. There is increased funding of university spinouts – often in successful ‘clusters’ in high-tech sectors, including those identified as Grand Challenges in the government’s modern Industrial Strategy.

There is still room, however, for considerable improvement in the supply of patient capital to finance businesses with high growth potential. Despite the increase in equity finance as a proportion of GDP in recent years, the UK remains well behind the US, and there are specific challenges around the funding of businesses with female founders.

Following the Patient Capital Review, the British Business Bank has taken measures to address these issues and increase the supply of patient capital, including British Patient Capital, a new £2.5bn programme to enable more long-term investment in high growth potential UK companies.

Awareness of finance options outside of traditional lending continued to grow in 2018:

• 52% of smaller businesses aware of P2P (up from 47% in 2017)

• 70% are aware of crowdfunding platforms (up from 60% in 2017)

• 69% aware of VC (62% in 2017)