The use of external finance by smaller businesses across the UK saw a consistent rise over the year across the UK, growing from 41% in Q1 to 50% in Q3. Working capital was the main reason for seeking finance for 58% of smaller businesses in 2023, up from 53% the year before.
Also, across the UK asset finance grew for the third year in a row, increasing 7% in 2023 to £23.5bn, the highest level on record. This 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 and smaller businesses[1] have looked to replace ageing vehicles and machinery.
Bank lending down
The total stock of UK bank lending in 2023 was £173bn, falling by 12% in real terms compared to 2022, but remains the third joint highest, on par with 2016. Gross bank lending to smaller businesses was £59.2bn in 2023, 9% lower than 2022, reflecting higher borrowing costs and economic uncertainty weighing on the demand for lending. Banks were also more cautious about the ability of businesses to repay.
Northern Ireland bucks the trend with growth in equity investment
UK 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. Northern Ireland bucked the national trend with strong growth of 39% to £58m – only Wales and the East Midlands had higher increases in value of equity deals.
While there was a sharp decline in UK 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.
Locally, the recently launched £70million Northern Ireland Investment Fund will help fight back against the decline in equity investment deals.
The fund will offer a range of commercial finance options with loans from £25,000 to £2m and equity investment of up to £5m. It will support businesses from all sectors in Northern Ireland and at different stages of their growth journey.
Belfast leading the way in FinTech inward investment
Developments in AI are continuing at a rapid pace, and these advances will have a profound impact on small business finance markets in the coming years.
The British Business Bank reports a steady increase in AI usage by finance providers over the past decade, with most UK financial organisations now using predictive AI. More than 70% of UK Finance members surveyed have generative AI at the proof of concept or pilot phase, with FinTech and new entrants leading the way.
These are important findings with Belfast the top ranking city in the world for FinTech inward investment projects, according to the FT fDi Markets 2023 report, and Northern Ireland ranking second overall.
Finance markets will be key in the transition to net zero
Finance markets have a critical role in funding innovation and the adoption of new cleaner technologies. The transition required to meet the UK’s net zero objectives will require significant investment across all areas of the economy.
The Government’s 2023 green finance strategy estimated that an additional £50bn-£60bn of capital investment per year will be required through the late 2020s and 2030s to meet the UK’s net zero commitments, with private sector investment forming the majority of this. If the UK is to meet its net zero targets by 2050, smaller businesses must be part of the solution, but they face many challenges in this transition.
This includes access to finance, which is a major block for 28% of the smaller businesses prioritising environmental sustainability over the next 12 months.
Challenger and specialist banks up
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.
Susan Nightingale, Director UK Network at the British Business Bank said: “The British Business Bank has been on a journey in Northern Ireland for the past decade and during that time we have witnessed a lot of positive changes. Supporting businesses in accessing finance has been key.
“In Northern Ireland, there is greater choice than ever before to help your business start up and scale up.
“A great example of this is the £70million Investment Fund for Northern Ireland which will provide both debt and equity finance and help support smaller businesses at different stages of their growth.
“I’m pleased 77% of smaller businesses are now aware of how to find out information about external finance. The British Business Bank will help guide them to the right finance to help them grow and thrive.”
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