Posted: Thu 7th Oct 2021
An uneven distribution of investors across the UK means the economy is missing out on the growth of many innovative businesses, according to a new report by the British Business Bank.
The Bank’s first regions and nations tracker showed that London, the South East, the North West and the East of England account for 86% of equity deals and 69% of private debt investment despite being home to just 55% of the UK's businesses.In contrast, Yorkshire and the Humber accounts for only 1.5% of equity investment and 4.9% of private debt activity while hosting 7.2% of companies.
The report said the imbalance is not due to a lack of high growth potential businesses but the fact that many don't have access to investors in their local area. Investors are far more likely to invest in businesses close to where they are based. In 82% of equity investment stakes between 2011 and 2020, the investor and company were within two hours of each other and 61% were located within one hour.
Rural business owners face particular challenges, the report found. Due to a lack of local investors, they were much more likely to turn to injecting personal funds into their businesses in 2020, especially in the construction sector. The report found 38% of rural construction entrepreneurs used personal funds compared to 27% of their urban counterparts.
Catherine Lewis La Torre, CEO of British Business Bank, said: "The lower flows of finance in certain regions and localities reflect a population of businesses operating with fewer choices.
"These gaps in growth finance are undoubtedly holding back ambitious entrepreneurs and lead to wasted economic potential. This is something the British Business Bank is committed to changing."
The Bank said 86% of businesses it has supported are based outside of London with £943m invested in non-London businesses between 2020 and 2021.
Small businesses' access to external finance
The study found that four in 10 businesses in the UK used external finance in 2021, with core debt products including overdrafts, loans and credit cards the most used forms of business finance in all regions and nations of the UK.
London still dominates growth finance, accounting for 62% of equity investment and 35% of private debt investment despite only having 19% of the UK's SME population.
The UK capital is one of three what the report calls "self-contained" areas due to the prevalence of the local equity investors backing local businesses. London is the most self-contained region, with 90% of equity investors in London businesses also based in London, followed by Scotland at 81% and the North East with 66%.