Businesses lending falls by 20% in Q3

14th December 2023

The latest Business Finance Review by UK Finance has revealed a 20% year-on-year drop in lending to SMEs. UK Finance’s latest data shows £3.5 billion was lent to SMEs in the Quarter 3 (Q3) of 2023 compared to £4.4 billion in the same period last year. This represents the fifth consecutive quarterly fall, while gross lending is down by just over a fifth when compared to 2022. Demand uncertainty, higher interest rates, and the impact of lending taken out during the pandemic have all contributed to the weakness in gross lending this year.

The third quarter saw a slight decrease in the number of approved loans and overdrafts from Q2, with the trend of more overdraft approvals compared with loans continuing.

The steady drop in overdraft approval numbers over the past year may be because cost pressures have eased, meaning that cashflow finance is not needed as much as during peaks last year.

SMEs in this sector have taken on new finance, mostly in new overdrafts to manage cashflow challenges and have used savings to navigate recent cost pressures. Invoice finance and asset-based lending (IF/ABL) saw a similar trajectory to other forms of finance, falling for the fourth quarter running, following robust growth as the economy emerged from the pandemic.

The data does, however, point to businesses retaining a good deal of headroom within existing IF/ABL facilities, with utilisation falling to 60 per cent in the most recent quarter, from 66 per cent a year ago.

UK Finance says that this year SMEs have proved resilient when faced with continued uncertainty. Despite this, the latest figures point to a stable picture for SME finances. Lenders are ready to support investment plans or help businesses facing difficulties. UK Finance encourages any businesspeople to speak to lenders to find out about the range of options available to them.

Looking ahead, businesses are being understandably cautious about taking on new finance. In 2024 we don’t expect this picture to change significantly in the coming quarters. Until businesses see a clearer path to a stronger and more certain recovery, they are unlikely to be focused on longer term investment and expansion. They will also be aware of the risk of further price shocks, which could erode any remaining cushion SMEs have available.

David Raw, Managing Director of Commercial Finance, said “SMEs in all parts of the economy continue to face a challenging outlook. Cost pressures may be easing but demand looks set to remain weak in the near term.”

“Our data suggests that SMEs are leaning more heavily on existing resources, particularly cash deposits, rather than seeking new finance. The higher interest rates environment will also be suppressing firms’ appetite to borrow.”

“A stronger demand outlook is ultimately what SMEs need to be confident to make investment decisions for future growth. And the Chancellor’s recent announcement on ‘full expensing’ of investment could provide an added boost for future plans.”

“Lenders are ready to support businesses across the UK. Financial services can help firms navigate current challenges and deliver growth and the sector stands ready to support any SMEs concerned about their financial obligations.”

Number of approved loans and overdrafts by size