Posted: Tue 8th Mar 2022
Equity investment in smaller businesses increased by 130% during the first three quarters of 2021, but disparities in access to finance remain, with ethnic minority-led companies most likely to face challenges finding funding.
According to 2021/22 data from the British Business Bank, £14bn in equity finance was invested in small businesses during the first nine months of last year, a 130% rise on the £6.1bn invested in the same period in 2020. With a quarter still to go in 2022, investment has already exceeded the £8.7bn invested in the whole of 2020.
Despite the increase in equity funding for small businesses, the report highlighted disparities in access to funding.
It found that half of ethnic minority-led businesses are open to using finance for growth compared to 32% of white-led businesses, with 64% of ethnic minority founders having ambitions for significant growth compared to 39% of white entrepreneurs.
Despite this, ethnic minority firms are more likely to be discouraged from applying for external finance and having their application turned down. Data shows that 18% of ethnic minority-led businesses were rejected for finance in 2020/21, compared to only 10% of their white counterparts.
As a result, ethnic minority founders are around twice as likely to cite access to finance as a barrier than white-led businesses. Additionally, 56% of ethnic minority-led businesses currently using finance said they thought it would be difficult for them to obtain finance again, compared to 42% of white-led companies.
For female-led businesses, appetite for external finance significantly increased significantly to 31% but remains lower than for male-led businesses at 39%. Women entrepreneurs are also more likely to be discouraged from applying for finance, citing issues such as uncertainty over where to find finance and concern over the application process being too burdensome.
For women entrepreneurs seeking equity finance, a progress report on the government-commissioned review of female entrepreneurship by Natwest chief executive Alison Rose highlighted how venture capital investment levels in female founders have remained "significantly low" at under 5%. In comparison, all-male teams accounted for 84% of total VC funding in 2020.
"There is a lack of transparency around how funding decisions are made, with various reports suggesting signs of perceived bias towards diverse businesses within the VC community," the update said.
"Female entrepreneurs have spoken about this bias by sharing their accounts of being judged as less competent than their male peers, despite having a similar degree of skills and business experience."
"This report shows a massive 130% increase in equity investment into smaller UK businesses, which is a hugely positive step forward in our recovery from the pandemic," small business minister Paul Scully said.
"However there is clearly more to do to get ethnic minority and women-led businesses on to a level playing field when it comes to accessing finance. The government will continue to work with the sector, including through Start Up Loans and the Rose Review of female entrepreneurship, to ensure everyone has the tools they need to succeed."
Following the increase in small businesses accessing finance as a result of the government's COVID-19 emergency funding schemes, the amount of debt held by small firms has significantly increased compared to pre-pandemic levels. At the peak in March 2021, debt stocks were estimated to be 30% up.
The report also showed that bank lending has returned to close to pre-pandemic levels, with 2021 lending down 45% from 2020, driven by lower drawdowns of government-supported loans.
The British Business said it was "encouraging" that debt repayments are "becoming a smaller share of businesses' cash flow as UK economic recovery helps boost turnover". The proportion of small and medium sized businesses (SMEs) with debt repayments making up more than 50% of turnover has declined since early 2021.
In 2021, 47% of smaller businesses said reducing their carbon emissions or environmental impact was a business priority and one in five would use external finance to help transition their business to net zero. Just over one in 10 of have already used external finance to support net zero actions.
In contrast, 71% viewed maintaining or increasing sales to be a high priority, and 37% that they would be happy to use external finance to grow their business.
Research suggests equity investors are increasingly considering environmental factors in investment decisions. A survey of UK venture capital fund managers by the British Business Bank found 83% are now taking into account environmental factors when making investments and 52% see environmental, social and governance (ESG) factors as a significant part of the decision making process.
According to previous British Business Bank research, SMEs are responsible for a third of the UK's emissions.
Despite the ethusiasm among businesses for helping to tackle climate change, a recent report by Enterprise Nation, Aviva and the Enterprise Trust found that only one in five SMEs say they will be taking actual steps to become more sustainable.
The report called for the government to provide more support for entrepreneurs to put green measures in place including offering financial rewards for taking environmental action.