Research conducted by the British Business Bank reports that bank lending dropped in 2023, delivering an amount similar to 2016. At the same time, equity capital in smaller firms cratered to levels near those in 2020.
When looking more closely at private equity financing, 2023 was a dismal year as just £1.512 billion was raised. You can compare this amount to 2022 when £2.7 billion was raised, or 2021 when £2.9 billion was committed.
The Small Business Finance Markets Report published by the Bank reflects on the fact that economic growth in the UK has been “subdued” due to inflation and higher interest rates along with challenges brought about by COVID.
The report shares that in 2014, just four large lenders provided the bulk of SME loans – around 63%. Since 2014, 60 new banking licenses have been granted, and the big banks’ share of lending has dropped to 41%. Alternatives include marketplace lenders and other online lenders. Today, online lenders can quickly provide debt capital to SMEs.
“45% of surveyed market intermediaries identified digitalisation transformation as one of the top changes to the financial ecosystem over recent years.”
One bright spot in the report is smaller business asset financing hit a record high of £23.5 billion in 2023. This is an increase of 7% versus 2022 and is the third yearly increase.
As for equity markets, this has changed, too, as in 2014, seed-stage investing stood at around 50%. Today, that percentage is 38%, and the report describes this as indicative of a maturing venture capital market, and the UK is now better able to support private firms.
“The UK has established its position as a global leader in VC, being the third largest VC market in the world. The UK has strengthened this position compared to ten years ago. The UK’s share of global VC investment value has risen from 3.4% in 2014-16 to 5.9% in 2021-23.”
Crowdfunding platforms, along with angel investors, have emerged as good sources of private capital for private firms. Specifically mentioned are Seedrs (part of Republic) and Crowdcube. The report states that by 2021-23, these platforms have become an active part of the UK SME equity market, participating in 19% of smaller business deals.
The report outlines four areas of importance for smaller firms gaining access to capital.
- Smaller businesses contribute a sizeable share of the UK’s Green House Gas (GHG) emissions, but face difficulties transitioning to net zero
- Artificial intelligence (AI) has the potential to shape small business finance markets over the next decade.
- Interest rates are unlikely to return to the ultra-low levels seen in much of the last decade.
- Recent economic conditions have resulted in rising small business closures.
Christine Hockley, Managing Director for Funds, British Patient Capital – a subsidiary of the British Business Bank, commented on the report, stating there has been a turn in the market that will queue things up for the next phase of equity investments.
“With £13.4 billion of dry powder to invest as of the end of 2023, which is 58% more than at the same point in 2021, there is a clear opportunity. Firstly, the equity finance market has matured: the UK VC market is the third largest in the world and has evolved from being an early-stage-focused market to one that can support companies at all stages. Most notably, follow-on deals made up 56% of the market, up from a third in 2014.”
Hockley says the opportunity is to use this money sitting on the sides to address funding gaps, especially in R&D-intensive sectors.
“Here, investment requires large pools of patient capital, and the UK market remains further from the global forefront. British Patient Capital’s Future Fund: Breakthrough programme was developed to address this, and just this week announced a £10 million investment in Curve Therapeutics, an innovative business pushing the boundaries of UK life sciences with its drug discovery platform. As Curve has demonstrated from its base in Southampton, there is huge potential outside of London, and we need to ensure investment continues to reach across the whole of the UK to build a strong ecosystem of innovation for the future.”
This is a solid report if you want to know about access to capital in the United Kingdom. It is available here.