Asset financing by small businesses grew for the third consecutive year in 2023, increasing 7% to £23.5bn, reflecting and easing of supply chain pressures and desire to replace ageing equipment.
The British Business Bank’s Small Business Finance Markets 2023/24 report also found the use of external finance by smaller consistently rise over the year, growing from 41% in Q1 to 50% in Q3.
This indicates a growing need for finance to support cash flows.
The report found that gross bank lending to smaller businesses fell to £59.2bn, down 9% in nominal terms. The decline reflects higher borrowing costs and economic uncertainty, as well as banks being more cautious about the ability of businesses to repay.
Also, 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%).
Smaller businesses raised £6.5bn of equity finance over the first three quarters of 2023, 53% less than during the same period in 2022, bringing 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 continue 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.
Louis Taylor, CEO, British Business Bank, said: “This year’s report sees a continuing increase in businesses seeking alternative finance options. 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, 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.”
The report claims that developments in AI are expected to have profound impact on small business finance markets in the coming years. It also states that finance markets will be key in the transition to net zero.