Growth in small businesses using alternative finance continues, while gross bank lending flatlines, finds British Business Bank research

• Asset finance up 32%, equity finance up 131%, marketplace business lending up 374% since 2014
• Gross lending from the major banks to smaller businesses flat over last five years
• Signs of improvement in supply of business finance to level-up the regions, but more to do

Published today, the British Business Bank’s Small Business Finance Markets 2019/20 report highlights significant long-term growth in alternative finance volumes over the last five years, with a 32% increase in asset finance, a 131% increase in equity finance and a 374% increase in marketplace business lending.

The British Business Bank was set up in 2014, with objectives including increasing the supply of finance to smaller businesses where markets don’t work well and helping to create a more diverse finance market.

Five years on, its latest report finds increased diversity across the smaller business finance market with the establishment of a range of new providers, products and platforms contributing to growth in the overall volume of funding accessed. More than half (52%) of smaller businesses that sought finance in 2019 contacted a finance provider outside of the ‘Big Five’ banks.

Bank lending flatlines

Over the same five-year period, gross lending to smaller businesses by the major banks has remained largely flat, with real term growth of just 1.2%. Gross bank lending was at £56.7bn last year, compared to £53bn in 2014.

Regional access to finance improves

Although London still dominates, there are encouraging signs that the regions outside the capital are making upward progress:

• Manchester, Edinburgh and Cambridge are in the top 10 local authority districts for number of equity deals over 2019
• Yorkshire and the Humber looks likely to see a record number of new companies raising seed equity funds in 2019
• Between 2014 and 2018 the proportion of British Business Bank-supported equity deals outside of London rose from 44% to 57%
• In 2018 its Northern Powerhouse Investment Fund and Midlands Engine Investment Fund accounted for 16% and 20% of the equity deals in their respective regions.

The Bank has put in place further measures to address some of the regional and other issues identified. These include a third regional fund – the Cornwall & the Isles of Scilly Investment Fund (CIOSIF) – and a Regional Angels Programme to support early-stage equity finance, especially in areas of the UK that are currently underserved.

Despite these measures, there remains more work to do to ‘level up’ the regions. Although debt finance remains evenly spread across the UK and is closely aligned with the size of the local business population, equity finance continues to be concentrated in London (accounting for 47% of deals and 66% of investment value in 2019).