Challenger and specialist bank lending to small businesses hits record high and surpasses high street incumbents

Challenger and specialist bank lending to small businesses hits record high and surpasses high street incumbents
Dan Martin
Dan MartinDan Martin Content & Events

Posted: Wed 1st Mar 2023

Challenger and specialist banks provided £35.5bn in finance to small and medium sized businesses (SMEs) in 2022, more than the amount lent by the UK's big high street banks, new research reveals.

The figure is the highest since records began in 2012 and gives new lenders, such as Starling, Metro Bank and Shawbrook Bank, 55% of the SME market, up from 51% in 2021.

The increase is the second year in a row challenger and specialist funders have lent more than the UK's five biggest banks (Barclays, Lloyds Banking Group, HSBC, NatWest Group and Santander) which traditionally dominate smaller business lending. The big banks lent £29.6bn bringing total lending to £65.1bn.

The report by the British Business Bank said the increase in funding by newer lenders suggests they are finding new opportunities such as providing finance to sectors most severely affected by the pandemic.

But despite this increase, overall demand for finance among small businesses was down significantly. In an indication of the challenges of rising inflation and interest rates, 33% of SMEs during the third quarter of 2022 were using external finance compared to 44% the year before.

Gross lending grew overall due to businesses seeking larger loans, but the success rates for finance applications fell from 80% in 2021 to 64% in 2022.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance”, said British Business Bank CEO Louis Taylor.

Challenges for ethic minority and female entrepreneurs

The report highlighted that female and ethnic minority are missing out when it comes to accessing finance to unlock growth.

Although ethnic minority-led businesses are more likely than other businesses to consider applying for finance, expectations of being rejected and concerns over the cost of finance prevent many from applying. More than three fifths of ethnic minority-led firms cited cost as a reason for not applying in 2021, an increase from 50% in 2020. It was also an issue for female founders.

Black, asian and other ethnic minority-led businesses were around three times as likely to see access to finance as a barrier to running their venture compared to white-led firms. This is a wider gap than in previous years, when ethnic minority-led businesses were around twice as likely to see finance as an obstacle.

These challenges over finance have a direct impact on business operations. Ethnic minority-led businesses that didn't receive all the finance they sought for cashflow were more likely to say they paid suppliers late, while female entrepreneurs were more likely to highlight implications for other investment in their business.

Lack of finance is inhibiting innovation

The report discusses the importance of innovation for boosting UK productivity and economic growth.

It highlighted that although the UK is ranked second in the G7 for its innovation environment, the country ranks fifth for the proportion of smaller businesses that are innovative. The UK would require around 440,000 more innovative small firms to meet the G7 average, the report said.

The report said innovative businesses are more likely to use some form of external funding, but the availability and cost of finance are identified as significant barriers to innovation. The Bank's analysis said these obstacles could be preventing around 270,000 SMEs from innovating each year.

Growth in net zero-related equity deals

The report said that equity finance markets are adapting to growing demand for investment in green innovation.

It found that net zero-related deals rose 33% during the first nine months of 2022, outperforming the wider UK equity market.

Net zero deals also currently make up 12% of all announced SME equity deals (5% in 2018). and investment in the deals rose by 184% over the past year, reaching a record £1.7bn.

Despite this, accessing finance opportunities is a challenge for smaller green innovators. One in five SMEs who see offering solutions to environmental problems as important for their business cited it as a barrier.

Relevant Enterprise Nation resources

Small business funding: How to choose the right type for you

10 small business grants you could be eligible for

Webinar: Five steps for fundraising for female founders

StartUp Series: Business finance

Book a free call with a finance expert

Dan Martin
Dan MartinDan Martin Content & Events
I'm a freelance journalist and event host who helps small businesses and the organisations that support them. I'm also Enterprise Nation's news reporter and Bristol Local Leader. I have 20 years of experience as a small business journalist having interviewed hundreds of entrepreneurs from famous names like Sir Richard Branson and Deborah Meaden to the founders behind brand new start-ups. I've worked for a range of leading small business publications and support groups, most recently as head of content at Enterprise Nation where I was responsible for the prolific output of content on the company's blog and social media. I now freelance for Enterprise Nation as the website's news reporter and as the host of the Small Business sessions podcast. I'm based in Bristol where I run and host regular events with the local small business community in my role as Enterprise Nation's Local Leader for Bristol. I also have strong connections with other major business organisations in the south west region. In total, I've hosted over 100 events including conferences with an audience of hundreds for international brands like Xero and Facebook and live web chats from inside 10 Downing Street. With my partner, I co-run Lifestyle District, a lifestyle blog focused on culture, art, theatre and photography.

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