Asset finance reached record high of £23.5bn in 2023

The British Business Bank’s Small Business Finance Markets 2023/24 report reveals that asset finance has grown for the third consecutive year, reaching a record high of £23.5bn in 2023, increasing by 7%/

The increase follows a rise of 11% in 2022 and 23% in 2021 and highlights the continued rebound in the asset class as supply chain pressures have eased as smaller businesses have looked to replace ageing vehicles and machinery.

The use of external finance by smaller businesses saw a consistent rise over the year, growing from 41% in Q1 to 50% in Q3. The rate of this increase indicates a growing need for finance to support cash flows, with a greater reliance on credit card (use is up from 12% of smaller businesses in Q1 to 20% in Q3) and overdraft finance (up from 11% in Q1 to 17% in Q3). Working capital was the main reason for seeking finance for 58% of smaller businesses in 2023, up from 53% the year before.

The total stock of bank lending in 2023 was £185bn, falling by 12% in real terms compared to 2022. Gross bank lending to smaller businesses was £59.2bn in 2023, 9% lower than 2022, but remains the third joint highest, on par with 2016. The decline in 2023 reflects higher borrowing costs and economic uncertainty weighing on the demand for lending. Banks were also more cautious about the ability of businesses to repay.

For the third consecutive year, challenger and specialist banks account for a higher share (59%) of total gross lending than the big five banks (41%).

The lending landscape has changed considerably since 2014, with the report revealing that 60 new banking licences have been granted in the last decade, with 36 being issued to providers serving smaller businesses. Non-bank lenders have addressed specific, underserved segments of the market with growth in lending from private debt funds, peer-to-peer lending and invoice and asset-based finance.

Smaller businesses raised £6.5bn of equity finance over the first three quarters of 2023, 53% less than during the same period in 2022. After two exceptional years, this brings such investment to around the level it was in 2020, still the fourth-highest year on record. While there was a sharp decline in activity in the second half of 2022, investment now appears to be stabilising at around £2bn per quarter in 2023.

Later stages of the UK equity finance market have continued to experience the largest reductions in investment. Growth-stage investment in the first three quarters of 2023 was £2.4bn, 65% lower than the same period in 2022. Venture and seed stage investment fell by 43% and 31% in 2023, respectively.

The growth stage was the main driver of market expansion over 2021 and the first half of 2022, and subsequently has also experienced the largest drop in both percentage and absolute terms since market conditions have worsened from the second half of 2022 onwards.

UK equity finance has matured over the last decade, becoming deeper and with a greater range of investors able to support companies at all stages of their development. The report finds that regional and place-based challenges remain in getting finance to many parts of the UK, however – particularly equity finance to rural, deprived or coastal areas.

Louis Taylor, CEO, British Business Bank, said “This year’s report sees a continuing increase in businesses seeking alternative finance options, evidenced by further growth from challenger and specialist banks, and asset finance providers. This is indicative of a persisting trend of finance markets offering a wider range of finance to smaller businesses with diverse finance needs.

“Although equity investment fell last year to levels last seen immediately prior to the pandemic, it is still healthy by historic standards. While there was a decline in activity in the second half of 2022, it is positive to note that investment appears to have stabilised in 2023, and at a relatively high level when looked at over the longer term.”