Small Business
Finance Markets
2019/20
FOREWORD
3
EXECUTIVE SUMMARY
5
INTRODUCTION
7
PART A: THEMES
1.1 FIVE YEARS ON – WHAT HAS CHANGED IN SMALL BUSINESS FINANCE MARKETS
8
1.2 IMPACTS OF MACROECONOMIC DEVELOPMENTS ON SME FINANCE MARKETS
19
1.3 FINANCE IN ENTREPRENEURIAL ECOSYSTEMS
27
PART B: MARKET DEVELOPMENTS
SMALL BUSINESSES AND THEIR USE OF FINANCE
2.1 SME BUSINESS POPULATION
38
2.2 USE OF EXTERNAL FINANCE
43
2.3 SME FINANCE AT A LOCAL LEVEL
51
FINANCE PRODUCTS
2.4 BANK LENDING
58
2.5 CHALLENGER AND SPECIALIST BANKS
66
2.6 EQUITY FINANCE
73
2.7 DEBT FUNDS
84
2.8 ASSET FINANCE
87
2.9 INVOICE FINANCE & ASSET-BASED LENDING
91
2.10 MARKETPLACE LENDING
94
GLOSSARY
98
ENDNOTES
102
British Business Bank
2
Contents
CONTENTS
The British Business Bank, established in 2014,
improves finance markets for smaller businesses
- wherever they are in the UK and wherever they
are on their finance journey – enabling them to
prosper and grow.
FOREWORD
KEITH MORGAN CBE,
CEO, BRITISH BUSINESS BANK
Our sixth Small Business Finance Markets report provides
a timely, comprehensive and impartial assessment of
finance markets for smaller businesses. Its insights and
analysis, combined with our market intelligence and
experience as an active market participant, enable the
Bank to act as a centre of expertise on finance for smaller
UK businesses and advise the Government on their
finance needs.
Since the Bank’s creation in 2014, there has been
significant long-term growth in finance flows outside of
traditional bank lending products, with equity finance
more than doubling, marketplace lending exceeding £2bn
in 2018 and asset finance growing by an average of 7%
per year since 2014. This is in contrast to bank lending,
where flows have been flat in real terms, driven by
weakness in demand for new loans and overdrafts and
a reluctance to take on external finance.
The past five years have seen increased competition
and innovation in the supply of SME finance. The
increased diversity in the range of providers, products
and platforms, together with increasing volumes in these
markets, means that smaller businesses have more
finance options to choose from than ever before. When it
comes to the demand for finance smaller businesses are
also prepared to consider more options, with over half of
those businesses that sought finance in 2019 contacting
finance providers outside the five main UK banks.
Looking forward, smaller businesses’ confidence is
showing signs of recovery following the economic and
political uncertainty of 2019. The Bank has worked with
other market participants and Government through the
Business Finance Council to ensure smaller businesses
can continue to access the finance they need to grow.
We will continue to monitor markets closely to help
smaller businesses respond effectively to the economic
opportunities and challenges in 2020.
Recognising the importance of smaller businesses
being able to access finance wherever they’re based,
a key theme of this year’s report is how entrepreneurial
ecosystems vary across the regions and localities of
the UK. The availability and ease of accessing finance
for smaller businesses depends greatly on locality,
with disparities particularly apparent in awareness and
availability of alternative finance options, particularly
those that finance growth. In this report, we examine
the characteristics of successful local ecosystems,
and how public and private sector intermediaries can
best collaborate to enhance the development of local
finance markets.
Foreword
3
Small Business Finance Markets 2019/20
This year, we’ve included more market intelligence
from our own programmes alongside the results of
our expanded Small Business Finance Survey to get a
more complete picture of smaller businesses’ use of
and attitudes towards finance across the UK. There are
signs of improvement in particular hubs – Manchester,
Edinburgh and Cambridge sit alongside 7 London
boroughs in the top 10 of local authority districts for
number of equity deals in the first three quarters
of 2019.
However, the Bank recognises there is more to be done
in addressing regional gaps on both the demand and
supply side. There are several ways the Bank looks to
tackle local disparities in finance markets, supporting
the Government’s aim of ‘levelling up’ the regions:
• With a Government commitment to expand our
Start Up Loans programme, we can continue to
support entrepreneurial activity, by providing loans
and mentoring, across the UK.
• We continue to support investment and high-skilled
employment through specific funds operating in the
Northern Powerhouse, Midlands Engine and Cornwall
& Isles of Scilly regions.
• The Bank’s UK Network works with intermediaries
to improve connectivity within local and regional
ecosystems.
• The Bank’s Finance Hub enables smaller businesses
to explore the finance options that would work best
for their business and signposts to relevant finance
experts and associations, to ensure that wherever
businesses are based they can access reliable,
independent information on their finance options.
The Bank continues to develop a strong evidence base
to underpin its interventions and proactively address
information gaps, such as collaborating with European
development banks on research to understand the
challenges UK businesses face when investing in
digitalisation and working with stakeholders to collect
data on the UK’s private debt market and business
angel investment.
We continue to expand the network of organisations
we work with in a bid to deepen our knowledge and
understanding of the ways in which finance markets
support smaller businesses. We know that previous
editions of our Small Business Finance Markets report
have proved to be a valuable source of information for
policy makers and others with an interest in ensuring
the success of the sector.
I hope you find this year’s report informative and useful.
British Business Bank
Foreword
4
Small business finance markets have always had a key
role to play in supporting small businesses, whether that
be helping start and grow new businesses or supporting
the activities of established SMEs. Business finance will
be particularly important as the UK economy adapts to
leaving the EU and responds to the opportunities and
challenges ranging from the generation and adoption of
new technologies to increased trade protectionism and
decarbonisation.
This report combines a look at developments in
Small Business Finance Markets in the five years since
the Bank was launched, with a more detailed look at
the developments in 2019 and prospects for 2020.
Four key findings stand out.
SIGNIFICANT GROWTH IN SME FINANCE MARKETS
OUTSIDE OF TRADITIONAL BANK LENDING PRODUCTS
SINCE 2014
First, there has been significant growth in the volume
of finance supplied to smaller businesses outside of
traditional bank lending products. Notably the value
of equity finance has more than doubled, driven by an
increase in large later stage deals. On the debt side asset
finance volumes have grown at a compound annual rate
of 7% and marketplace business lending exceeded £2bn
in 2018. This growth in volumes reflected a significant
increase in SMEs’ awareness of the products available to
them and has provided support to a wide range of start-
ups and smaller businesses looking to invest and grow.
However, many smaller businesses are reluctant to use
finance, with falling demand for core bank products
from 2014 to 2018. While use of external finance did
increase in 2019, the long-term decline in applications for
term loans has not reversed. This has been reflected in
relatively flat levels of bank lending.
The decline in applications reflects smaller businesses’
continued desire to avoid debt finance in recent years
with more than 70% of SMEs saying that they
would forego some growth in order to avoid taking on
more debt. In addition, smaller businesses underestimate
their chances of success when applying for finance.
Improving the demand side of the small business finance
market therefore remains a key objective of the British
Business Bank.
INCREASED RANGE OF PROVIDERS IN BANKING AND
OTHER SME FINANCE PRODUCTS
The increase in volume of SME finance has been matched
by an increase in the range of providers of products,
many of them offering new ways of delivering finance.
Between 2013 and 2019 over 40 new bank licences
were granted, around half of which went to challenger
or specialist banks that provide services to businesses.
These range from online only banks to more traditional
branch-based delivery models.
5
Executive summary
EXECUTIVE
SUMMARY
Small Business Finance Markets 2019/20
Emerging providers of SME finance have also gained
an increased share of other debt product markets,
for example the share of asset finance provided by
independent challenger and specialist banks has
increased steadily in recent years.
In equity finance there is a greater range of fund
managers in the market with 26 funds closing in
2019, many of them new or emerging fund managers,
resulting in an increase in available capital.
This significant entry of new providers and products
has been supported by the British Business Bank which
has made an important contribution to growing supply
capacity and helping increase competition in SME
finance markets.
ECONOMIC UNCERTAINTY LED TO INCREASED DEMAND
FOR SHORT-TERM FINANCE IN EARLY 2019
Turning to more recent developments, 2019 saw a
weak and uncertain economic environment, driven
by EU exit uncertainty and wider economic concerns
such as increased trade protectionism. This resulted in
lower business confidence and a decline in investment
intentions amongst SMEs.
In the run up to the initial EU exit date of 31st March 2019,
there was an increase in the use of external finance
peaking at 46% of SMEs using at least one external
finance product in H1 2019. The increase in use was
concentrated in short-term debt products, such as credit
cards and overdrafts, and asset finance products. Use of
finance has fallen back slightly to 43% in Q4.
British Business Bank survey work undertaken in the
Autumn of 2019 suggested that the majority of smaller
businesses did not expect leaving the EU to impact,
either positively or negatively, on their growth prospects.
However, the majority of those expecting an impact
reported that it would have a negative impact.
Since the Withdrawal Agreement was reached, there
have been some signs of a recovery in business
sentiment, with monthly bank lending data improving
in November and December and some forecasters
suggesting improved business investment and economic
growth in 2020. The Bank will continue to monitor SME
finance markets closely in 2020.
IMPROVING REGIONAL & LOCAL ENTREPRENEURIAL
ECOSYSTEMS WILL HELP REDUCE LOCAL ECONOMIC
DISPARITIES
Previous Small Business Finance Market Reports have
reviewed the regional distribution of SME finance.
This year the report looks in more depth into the
characteristics of successful entrepreneurial ecosystems.
This is particularly important in the context of some signs
of weakness in entrepreneurial activity in 2019, and
slower growth of early stage equity finance compared to
late stage growth.
Understanding local ecosystems highlights not just the
links between suppliers and users of finance, but how
they interact with other intermediaries. This is the case,
both for private intermediaries such as financial advisers,
accountants and other business services, but also the
public sector bodies such as growth hubs and Local
Enterprise Partnerships.
THE BRITISH BUSINESS BANK CONTINUES TO DEVELOP
ITS ACTIVITIES IN SME FINANCE MARKETS
The British Business Bank strategy has evolved to both
reflect, and shape, the market developments highlighted
above. The increase in equity activity following the
creation of the Bank’s dedicated equity finance business,
British Patient Capital, and the establishment of
regional funds such as the Northern Powerhouse and
Midlands Engine Investment Funds, has helped shape
developments.
And the increase in our demand side activity, for
example with the creation of the Finance Hub and the
UK Network, which works with small business finance
intermediaries to enhance business finance ecosystems,
will help develop a better functioning market for smaller
business finance.
British Business Bank
Executive summary
6
This is the sixth annual British Business Bank Small
Business Finance Markets report, setting out the
latest evidence on the ways in which finance markets
support smaller businesses and help them contribute to
improving productivity and growth in the UK economy.
Our understanding of smaller business finance markets,
both in terms of the latest available data on SMEs and
their financing needs, and the intelligence obtained
as an active participant in finance markets, is central
to delivering on our objective to be the centre of
expertise on smaller business finance markets in the UK,
providing advice and support to Government. It is also
used to shape our business plan and the design of our
programmes and products.
NEW EVIDENCE AND ANALYSIS
The British Business Bank has continued to develop
evidence and analysis to deepen our understanding of
smaller business finance markets. In particular:
• Our annual Small Business Finance Survey has been
expanded to 4,000 interviews to give greater insight
into variation in SME finance across the UK.
• We have added extra sections to Part B of the report
to give more insight into developments in challenger
bank activities and invoice and asset-based lending.
• We draw on our own Management Information (MI)
and experience as a market participant to gain insights
into use of Bank-supported programmes across the UK.
The report draws on data available through to the end
of January 2020.
This report also references a wide range of evidence
drawn from government, market and academic research.
We are keen to further increase the range of researchers
we work with.
STRUCTURE OF THE REPORT
As usual the report is split into two sections to allow both
consideration of broader trends and issues in SME finance
markets, and to explore specific segments of the market
in detail.
Part A provides a thematic overview looking in turn at SME
finance markets over the last five years, the impact of the
macroeconomy on SMEs’ use of finance and a review of the
role of finance in entrepreneurial ecosystems.
Part B examines in more detail developments in the small
business population. It then considers in more depth the
market for different types of debt and equity finance
most widely used by smaller businesses, identifying the
drivers of the latest trends in the market.
7
Introduction
INTRODUCTION
Small Business Finance Markets 2019/20
• Significant growth in finance volumes since
2014, except for core bank lending products
• Small businesses remain reluctant to use
finance, with lack of demand the main
driver in the decline in the use of core bank
lending products
• Increased diversity in many of the
dimensions of small business finance
markets with significant entry of new
providers and new product developments
• The recent increase in later stage equity
finance should help improve scale-up
performance of UK smaller businesses
over time
• Significant regional and local variation,
particularly in smaller businesses’ use of
equity finance
• The British Business Bank strategy
has evolved to both reflect, and shape,
market developments
It is just over five years since the launch of the British
Business Bank and the first Small Business Finance
Markets report. That publication identified three themes.
First, that more smaller businesses would seek finance
for growth following the recovery from the financial crisis.
Second, that a more diverse and vibrant supply of finance
was needed. Third, that awareness and understanding of
the range of finance options was patchy with some small
businesses discouraged from applying.
These themes link to three of the Bank’s four original
objectives, namely to increase the supply of finance
available to smaller businesses in areas where markets do
not work well, to create a more diverse finance market for
smaller businesses and to help ensure better provision of
information in the market, connecting smaller businesses
and finance providers.
This chapter reviews developments in the small
business finance markets over the subsequent five
years, identifying how those markets have evolved and
concluding by summarising the evolution of the British
Business Bank’s activities to reflect that changing market.
British Business Bank
8
1.1 Five years on - what has changed in small business finance markets
1.1 FIVE YEARS ON – WHAT HAS
CHANGED IN SMALL BUSINESS
FINANCE MARKETS
SIGNIFICANT GROWTH IN FINANCE VOLUMES SINCE
2014, EXCEPT FOR CORE BANK LENDING PRODUCTS
Each edition of the Small Business Finance Markets
report has included a core table tracking the volume
of several of the key finance products used by smaller
businesses. The annual volume of activity for each
product from 2014 onwards is included, as well as the
latest available data for 2019 (figure A.1).
Bank lending, measured both by stock and gross flows
was close to flat in nominal terms between 2015 and
2018. This followed a rise in gross bank lending of £4.4bn
from 2014 to 2015. In 2019 gross flows fell by 1.7% to
£56.7bn, the lowest figure for five years. This represents
a significant real fall in the gross flow since 2015. Real
bank lending flows increased by 1.2% from 2014 to 2018,
but the real decline from 2015 to 2018 is 6.0%.1
FIG A.1
VOLUMES OF MAIN SME EXTERNAL FINANCE PRODUCTS (£BILLION) (a)
Source: As in table
2014
2015
2016
2017
2018
2019
Bank lending stock
Source: Bank of England
Outstanding Amount
167
164
166
165
166
168
Bank lending  ows
Source: Bank of England
Gross  ows (b)
53.4
57.9
59.2
57.3
57.7
56.7
Other gross  ows of SME Finance
Private external equity investments
Source: Beauhurst
2.9
4.2
3.9
6.4
6.7
5.5 (Sep)
No. of reported deals
1406
1562
1524
1710
1602
1241 (Sep)
Asset  nance  ows
Source: FLA (c)
14.7
16.3
17.0
19.0
19.4
20.1
Marketplace lending business lending  ows
Source: Brismo & British Business Bank calculations (d)
0.50
0.90
1.39
1.99
2.37
1.90 (Sep)
(a) The information contained in this table should be viewed as indicative as data and de nitions are not directly comparable across di erent sources.
There can be some double counting across estimates in di erent parts of the table. Flows data are cumulative totals for the year or to the date stated.
Non-seasonally adjusted.
(b) Data exclude overdrafts and covers loans in both sterling and foreign currency, expressed in sterling.
(c) The Finance & Leasing Association (FLA) whose members make up 90-95% of the market.
(d) Figures do not represent the entire market. Data obtained from Brismo.
Following the financial crisis there was a focus on both
gross and net lending. Gross bank lending was on an
upward trend from 2012 to 2014 as levels recovered
from the financial crisis, however repayments were on
a similar upward trend. As a result, net lending did not
turn positive until the final quarter of 2014. Since then
net lending has been positive but only just so in 2017
and 2018. UK Finance data gives a similar picture for
term loans and overdrafts, see section 2.4 for a more
detailed discussion.
Other products have all shown considerable nominal
growth between 2014 and 2018. Asset finance, already
a significant source of funding for smaller businesses,
grew at a compound annual growth rate (CAGR) of
7% from 2014 to 2018, and showed continued growth
in 2019.
1.1 Five years on - what has changed in small business finance markets
9
Small Business Finance Markets 2019/20
Marketplace business lending, formerly referred to as
peer to peer lending, was still in its infancy in 2014 and
demonstrated a remarkable CAGR of 48% from 2014 to
2018, becoming a significant source of finance to smaller
businesses. Growth has fallen back in 2019, and the
sector is facing some challenges. These are discussed in
more detail in section 2.10: Marketplace lending.
Outside of debt finance, the value of external equity
finance provided to smaller businesses increased
markedly between 2014 and 2018 with a 23% CAGR
leading to a doubling of equity investment. However, it
should be noted that the growth in deal numbers, whilst
still significant, is lower at 3%, resulting in a rise in the
average deal size, see section 2.6: Equity finance for a
discussion of more recent developments.
The rapid growth of equity finance and marketplace
lending, combined with the consistently significant
growth of asset finance, demonstrate the increased
diversity in the volume of finance products used by
smaller businesses.
SMALL BUSINESSES REMAIN RELUCTANT TO
USE FINANCE, WITH LACK OF DEMAND THE MAIN
DRIVER IN THE DECLINE IN THE USE OF CORE
BANK LENDING PRODUCTS
Despite the relatively healthy performance of the
aggregate flows of the main SME finance products, the
share of small businesses using external finance did not
increase from 2014 to 2018 (figure A.2). The number of
SMEs using external finance had been on a downward
trend following the financial crisis, whilst this stabilised
from 2014 to 2018 it is only in 2019 that the series
showed a significant increase.
Unsurprisingly, the trend in permanent non-borrowers,
those who are not using external finance, have not done
so in recent years and are not planning to do so, rose
significantly through to 2015 and has only begun to fall
in 2019, the reasons for which are explored in section
2.2: Use of external finance.
These trends have been driven by a decline in the use
of core debt finance products traditionally supplied by
banks. Through to 2018, use of credit cards remained
weak, with bank loans also low relative to 2012. Use of
bank overdrafts showed a significant decline, but with
a partial recovery in 2017 and 2018. Since 2018, credit
card and overdraft use rose to their highest levels,
at 23% and 19% respectively in H1 2019 (figure A.3).
201320142015201620172018Q1 2019Q2 2019Q3 2019Q4 20192012Per centUse any external nance
Permanent non-borrowers
0
10
20
30
40
50
60
FIG A.2
SMEs USING EXTERNAL FINANCE AND PERMANENT
NON-BORROWERS
Source: BVA BDRC SME Finance Monitor, 3 months to December 2019. 2011 data not
shown consistent with BVA BDRC reporting. Dotted line denotes start of quarterly data.
FIG A.3
SME's USING CORE FINANCE PRODUCTS OVER TIME
Source: BVA BDRC SME Finance Monitor Q2 2019
0
2
4
6
8
10
12
14
16
18
20
22
24
26
2013
2014
2015
2016
2017
2018 H1 2019
2012
Per centBank overdraft
Credit cards
Bank loan / commercial mortgage
British Business Bank
1.1 Five years on - what has changed in small business finance markets
10
This lower usage of core bank lending products has
reflected reduced applications for new loans and
overdrafts (figure A.4). Changes to the question for
2018 made direct comparison difficult but the number of
applications for new loans is likely to have continued to
decline, with latest data suggesting the application rate
was 1.3% in the 6 quarters to Q2 2019. In contrast, the
number of overdraft facilities granted increased in the
run up to the March 2019 EU withdrawal date according
to UK Finance data.
The supply of bank lending to SMEs, as measured by
credit conditions, has been relatively strong in recent
years. The net balance of credit conditions as reported by
bank lending officers has been neutral or positive from
2015 through to early 2019, with a marginal decline in
second half of 2019 for medium-sized businesses.
Further evidence for relatively benign lending
conditions is provided in the cost of lending. Bank of
England data suggests that the effective interest rate
has remained below 4% in recent years. This suggests
that the fall in demand was not caused by a tightening
of lending conditions.
The decline in demand for core bank lending products
supplied by the main bank may in part be explained by
the rise in the awareness of alternative finance products
such as equity products and marketplace lending (figure
A.5) supplied by other providers. However, the increase
in the number of users of these products has not been
sufficient to account for the total fall in demand for bank
products. Furthermore, the decline in overall use of
external finance points to a net fall in demand for finance
since the financial crisis.
The most likely explanation for the weak levels of
demand is the growing unwillingness of SMEs to use
finance to grow and develop their businesses. The share
of SME willing to use finance to grow and develop fell
sharply from 45% to less than 30% in 2019 (figure A.6).
The growing evidence on the weak demand for external
finance has driven the development of increased British
Business Bank demand side activity to help smaller
businesses understand and identify suitable finance
options to help the business grow.
FIG A.4
NEW DEBT APPLICATION RATES
Source: British Business Bank Analysis, SME Finance Monitor. Data is presented over
all applications reported in the 10 quarters to the end of the period stated.
0
1
2
3
4
5
2013
2014
2015
2016
2017
2012
Per centNew overdrafts
New loans
FIG AX4
NEW DEBT APPLICATION RATES
Source: British Business Bank Analysis, SME Finance Monitor. Data is presented over
all applications reported in the 10 quarters to the end of the period stated,
(10 quarters have been pooled together to increase sample size). For example, ‘2016’
represents results across all applications in the 10 quarters ending Q4 2016.
Only exception is ‘2012’, which represents all applications in the 8 quarters to the end
Q4 2012 (as the SME Finance Monitor has collected data from Q1 2011).
Per centLeasing / Hire PurchaseVenturecapitalistsEquitycrowdfundingplatformsMarketplacelendingBusinessAngelsMezzaninenance2014
2015
2016
2017
2018
2019
FIG A.5
AWARENESS OF ALTERNATIVE FINANCE PRODUCTS
Source: British Business Bank Business Finance Survey 2014-19
0
10
20
30
40
50
60
70
80
90
100
2016
2017
2018
Q1
2019
Q2
2019
Q3
2019
Q4
2019
2015
FIG A.6
SHARE OF SMES WILLING TO USE FINANCE TO GROW
AND DEVELOP
Source: BVA BDRC SME Finance Monitor, 3 months to December2019.
Dotted line denotes start of quarterly data.
0
10
20
30
40
50
Per cent 1.1 Five years on - what has changed in small business finance markets
11
Small Business Finance Markets 2019/20
INCREASED DIVERSITY IN MANY OF THE DIMENSIONS
OF SMALL BUSINESS FINANCE MARKETS WITH
SIGNIFICANT ENTRY OF NEW PROVIDERS AND NEW
PRODUCT DEVELOPMENTS
Diversity in finance markets can help improve the
outcome for smaller businesses seeking finance.
Increasing diversity of SME finance was an original
objective of the British Business Bank, with the Bank
seeking to support both new products and new providers
entering the market.
A typology has been used to capture the potential
benefits arising from diversity, these include who has
access, where finance can be accessed, what terms,
when access can be arranged and how access is delivered
(figure A.7)
This typology enables us to consider the different
aspects of diversity in turn, briefly summarising the trend
over the last five years. Taking WHO first, this refers to
the characteristics of the SME such as the size, age and
sector of the SME.
Historically, the larger the SME, the more likely it was
that they would use external finance, with a distinct gap
between zero employee businesses, where only 43% use
finance, compared to medium-sized businesses with 77%
using external finance (figure A.8).
This result is consistent with other surveys including
the Bank’s Business Finance Survey 2019 which found
that only 38% of zero employee businesses had sought
finance in the last three years compared to 83% of
medium sized businesses. This is not surprising as larger
businesses are more likely to have collateral to provide as
security and have significant finance experience within
the business increasing their ability to access a wide
range of finance products.
FIG A.7
TYPOLOGY OF DIVERSITY OF FINANCE
Source: British Business Bank, The Bene ts of Diverse Finance Smaller Business Finance Markets
Who has access
(turnover)
• Finance reaches subsets of SMEs that cannot access mainstream  nance
and/or for whom mainstream products are not suitable or relevant
• Can be driven by di erent risk appetite or di erent qualifying requirements
New Product
New Provider
Where can  nance be
accessed (turnover)
• New provider supplies a type of  nance to SMEs in a region where that
type is otherwise rare/unavailable
• Can be driven by a di erent approach to decision-making, e.g.
decentralisation
New Provider
What terms is  nance
accessed on (terms)
• Increased competition improves terms (including duration and repayment)
for some  nance
• Can be driven by better suitability of a form of  nance to the needs of
subsets of SMEs
New Product
New Provider
When access can be
arranged (bene ts)
• SMEs can access  nance faster, or more conveniently than they could
otherwise
• Can be driven by di erentiated business models or product features
New Product
New Provider
How access is delivered
(bene ts)
• SMEs access  nance that comes with ancillary business bene ts that are
not otherwise available
• Can be driven by indirect impact on  nance economics
New Product
New Provider
British Business Bank
1.1 Five years on - what has changed in small business finance markets
12
However, figure A.8 suggests that the gap has
decreased with micro-enterprises (1-9 employees)
use of external finance (51% in H1 2019) closer to
zero employee businesses (43% in H1 2019) in the last
two years.
Turning to sector, it is not surprising that some make
greater use of external finance than other sectors,
given their distinct characteristics. But there have been
some changes in the relative use of external finance
between sectors. Notably, use of external finance by
SMEs in the health sector increased rapidly from 2016,
with use by property and business services SMEs
declining (figure A.9).
WHO can also refer to the ownership of smaller
businesses as well as the business itself. Over the last
five years increasing attention has been given to different
dimensions of diversity and whether this is reflected in
differences in use of finance. For example, evidence has
shown the very limited use of venture capital by female
founded smaller businesses. Research undertaken by the
British Business Bank in partnership with Diversity VC
and the BVCA found that for every £1 of venture capital
(VC) investment in the UK, all-female founder teams get
less than 1p, all-male founder teams get 89p and mixed-
gender teams 10p.2
The British Business Bank is planning further research
to gain better understanding of the drivers of
entrepreneurship and SME ownership patterns across
this and other dimensions of diversity.
Turning to WHERE, there are distinct patterns of SME
finance use, in particular in equity finance, at the regional
level and much greater variation still at the local level.
This is in part driven by the sectoral composition of
the economy at the regional and local level, but is also
impacted by the depth of the finance ecosystem in those
regions. Regional developments over the last five years
are considered later in this chapter and in more detail
in the section 1.3 and 2.3 on Finance in Entrepreneurial
Ecosystems and SME Finance at a local level respectively.
On WHAT terms is a key question for many smaller
businesses. Increased competition has the potential
to improve terms for SMEs, for example when new
entrants join the market or SMEs are able to more easily
switch supplier. An important development was the
Competition and Markets Authority Retail banking market
investigation which introduced recommendations in
areas such as Open Banking.3
2013
2014
2015
2016
2017
2018 2019 H1
2012
50 - 249 emp
10 - 49 emp
1 - 9 emp
0 emp
FIG A.8
USE OF EXTERNAL FINANCE BY SMEs BY FIRM SIZE
Source: BVA BDRC SME Finance Monitor, Q2 2019
0
10
20
30
40
50
60
70
80
90
Per cent2013
2012
2015
2016
2017
2018
2019 H1
FIG A.9
USE OF EXTERNAL FINANCE BY SMEs BY SECTOR
Source: BVA BDRC SME Finance Monitor, Q2 2019
Manufacturing
Health
Wholesale/Retail
Di
0
10
20
30
40
50
60
Per cent 1.1 Five years on - what has changed in small business finance markets
13
Small Business Finance Markets 2019/20
Furthermore, the increased range of providers and
products has increased the variety of terms and
conditions on offer, increasing the likelihood of SMEs
being able to find a suitable form of finance to meet their
needs. This has increased the demand for information
about the finance options available, with the British
Business Bank playing a role in this through its Finance
Hub and Business Finance Guide.4
WHEN and HOW SMEs access external finance has
continued to evolve rapidly in the last five years. For the
first time, more than half of SMEs that sought finance in
2019 contacted finance providers outside of the five main
UK banks. Technological improvements have increased
the variety of ways in which finance providers can
engage with customers. This has occurred through new
entrants to banking and other markets, who focus on
new approaches, such as online only banks. Established
providers have also greatly broadened the range of ways
that SMEs can access their products. The discussion on
challenger banks in section 2.5 explores many of these
developments in more detail.
In conclusion, there have been significant positive
developments across many dimensions of diversity,
although there is still room for improvement. The extent
to which the increased diversity of finance markets has
had a positive effect on finance markets will only be fully
tested in the event of an economic downturn.
THE RECENT INCREASE IN LATER STAGE EQUITY
FINANCE SHOULD HELP IMPROVE THE SCALE-UP
PERFORMANCE OF UK SMALLER BUSINESSES
OVER TIME
High growth firms have long been identified as important
to economic growth.5 High growth firm data has tended
to focus on definitions related to the OECD definition
which focuses on employment growth of 20% per annum
for three years. Estimates of the number of high growth
firms in the UK are available from a number of sources.
The ERC looks at a wider range of metrics designed
to capture different stages of scale-up that smaller
businesses may go through. These include the standard
OECD high growth firm definition and also a small high
growth firm definition based on SMEs adding at least 8
employees over 5 years (figure A.10).
2011/14
2012/15
2013/16
2014/17
2015/18
2010/13
Small HGFs
HGFs
FIG A.10
INCIDENCE OF HIGH GROWTH FIRMS OVER TIME
Source: Enterprise Research Centre, Local Growth Dashboard 2019
0
1
2
3
4
5
6
7
8
Per centBritish Business Bank
1.1 Five years on - what has changed in small business finance markets
14
The incidence of high growth firms fell from 2012/15
to 2013/16 but has remained stable since then. The
incidence of small high growth firms, defined as small
businesses adding at least 8 employees over a three-year
period has declined from 2011/14 to 2015/18.
The Scaleup Institute also looks at a broad range of high
growth measures including those businesses that have
increased either employment or turnover by 20% a year
over a three-year period, and those that have increased
both turnover and employment by 20%.
This suggests that the number of high growth firms
based on turnover growth has been markedly better than
based on employment growth (figure A.11). Overall the
evidence on the number and share of high growth firms
has been stable or increasing slightly depending on the
metric chosen.
Given the need for significant growth over a three-year
period, and the potential for external finance to take
some time to impact on firm growth, it is still too early to
demonstrate the impact of finance delivered in the last
three years on the performance of the UK economy in
generating high growth firms.
But there is strong evidence that equity finance is more
likely to have been used where the growth performance
has been greatest (figure A.12). Firms looking to scale-up
use a wide variety of finance to support and deliver their
growth plans. Where the risk is highest, equity finance is
particularly useful.
2014
2015
2016
2017
2013
By employee or turnover growth
By turnover growth
By employee growth
By employment and turnover growth
FIG A.11
NUMBER OF HIGH GROWTH BUSINESSES BY MEASURE OF
GROWTH OVER TIME
Source: ScaleUp Institute (2019) 'The Scaleup Review 2019'
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
20-40%
40-60%
60-80%
Turnover growth segment as measured by business accounts
80-100%
100%+
Used equity nance
Did not use equity nance
0
10
20
30
40
50
60
70
80
90
100
FIG A.12
PROPORTION OF HIGH GROWTH FIRMS USING EQUITY FINANCE
Source: ScaleUp Institute and Beauhurst (2019) 'The Scaleup Index 2019'
23%
34%
44%
49%
56%
Per cent 1.1 Five years on - what has changed in small business finance markets
15
Small Business Finance Markets 2019/20
During the government Patient Capital Review, evidence
from the British Business Bank was used to demonstrate
UK SMEs’ use of follow on equity finance. UK start-ups
receiving early stage equity finance, commonly called
seed or Series A funding, between 2008 and 2010 were
less likely than their US counterparts to receive follow on
funding.6 In addition, the value of finance received in each
round was markedly lower for UK firms seeking later stage
funding than for those in the US.
A particularly welcome development is the increased
likelihood of receiving later stage equity finance. UK firms
receiving initial VC funding in 2011-12 are now able to
receive subsequent funding rounds with a frequency that
closely matches the US (figure A.13).
However, there remains a significant gap in terms of the
size of the average deal (figure A.14). Although this can
be partly explained by smaller product market size for
companies targeting domestic markets relative to US VC
backed companies, it does make it more difficult for UK
firms to expand rapidly in global markets.
The greater number of later stage equity deals received
by scale-ups in the previous five years will not yet have
fully impacted on the high growth firm data series and
other scale-up metrics. First, it may take some time for
finance to impact on firm growth, and second, with most
scale-up metrics measuring growth over a three-year
period, the growth impact of finance received will not be
captured in scale-up data.
It will therefore take time to fully access the growth
impact of finance on scale-up firms. Where that finance
has been facilitated by the British Business Bank, the
growth impact will be assessed by the rolling programme
of evaluations of the Bank’s finance products.7
Round 2
55%
57%
35%
36%
19%
22%
11%
11%
5%
5%
2%
2%
Round 3
Round 4
Round 5
Round 6
Round 7
UK
US
FIG A.13
COHORT ANALYSIS OF COMPANIES RECEIVING INITIAL
VC FUNDING IN 2011-2012
COMPANIES WITH SUBSEQUENT FUNDING ROUNDS
Source: British Business Bank analysis of PitchBook
Round 2
Round 1
£1.8
£1.2
£4.0
£7.8
£12.2
£21.7
£36.3
£65.7
2%
Round 3
Round 4
Round 5
Round 6
Round 7
UK
US
FIG A.14
COHORT ANALYSIS OF COMPANIES RECEIVING INITIAL
VC FUNDING IN 2011-2012
AVERAGE DEAL SIZE BY FUNDING ROUND (£ MILLION)
Source: British Business Bank analysis of PitchBook
£1.9
£3.4
£5.1
£9.0
£22.6
£23.3
British Business Bank
1.1 Five years on - what has changed in small business finance markets
16
SIGNIFICANT REGIONAL AND LOCAL VARIATION,
PARTICULARLY IN SMALLER BUSINESSES’ USE OF
EQUITY FINANCE
Regional patterns of SME finance have been a regular
feature of the Small Business Finance Markets
publication since the 2015/16 report. Discussion has
focused on the concentration of equity finance in
London, Oxford and Cambridge, sometimes referred to as
the Golden Triangle.
Although there has been some variation from year to year,
the volume of external equity finance received by smaller
businesses in London (figure A.15) considerably exceeds
the region’s share of SMEs and High Growth Firms.
Greater attention is now being given to within region
variation. The British Business Bank Equity Tracker
publication has, since 2016, included an analysis of
the local authorities with the most equity deals. This
has demonstrated the extent to which equity activity
is clustered in a relatively small number of cities. Even
within London, equity deals are concentrated in certain
boroughs with Westminster, City of London, Islington,
Hackney, Camden and Southwark taking the top six
positions in terms of deals by local authority district in
first three quarters 2019.8
Analysis in the British Business Bank Equity Tracker
2019 publication looked at various measures of equity
deal concentration in the UK which suggested that
concentration peaked in 2015/16 with some decline
since then. Possible suggestions for this slight increase
in diversification is that there has been an increase in VC
funds with offices outside London.
On the debt side, the distribution of core bank lending
activity has always been more closely aligned to the
regional share of the business population. Indeed,
London has frequently looked underweight on bank
lending compared to the share of the UK SME business
population based in London.
2015
2016
2017
2018 2019 (Q1-3)
2014
Investment
Deals
FIG A.15
PROPORTION OF UK EQUITY DEALS AND INVESTMENT GOING
TO COMPANIES IN LONDON
Source: British Business Bank analysis of Beauhurst data
0
10
20
30
40
50
60
70
Per cent 1.1 Five years on - what has changed in small business finance markets
17
Small Business Finance Markets 2019/20
This ‘lack’ of lending in London, may in part reflect the
relatively high number of businesses registered in
London, for example, where a headquarters, or registered
office is listed in London, but relatively little economic
activity takes place. Furthermore, London based SMEs
have consistently been found to be aware of a wider
range of finance options, hence lack of bank lending may
reflect greater use of a wider range of debt products.
Unfortunately, neither regional nor more local level data
is available for many debt finance products. The British
Business Bank is looking to work more closely with
representative bodies and data providers to increase the
availability of disaggregated data for more debt finance
products.
British Business Bank activities have expanded since
2014 to include the funds covering regions such as the
Northern Powerhouse, the Midlands Engine and Cornwall
& the Isles of Scilly.
THE BRITISH BUSINESS BANK STRATEGY HAS
EVOLVED TO BOTH REFLECT, AND SHAPE, MARKET
DEVELOPMENTS
Following the financial crisis, SME finance markets have
been monitored more closely, with significant additional
data sources becoming available. British Business
Bank activity has evolved, based on our analysis and
understanding of evolving problems in the markets
and significant government policy developments,
most notably the Industrial Strategy and the Patient
Capital Review.
Three examples are particularly important
• First, the creation of the Bank’s British Patient
Capital subsidiary responded to an identified market
gap for equity finance to support the continued
growth of scale-up businesses.
• Second, the creation of a series of regionally focused
funds to help correct regional imbalances via the
Northern Powerhouse Investment Fund, the Midlands
Engine Investment Fund and the Cornwall & Isles
of Scilly Fund. These funds are key components in
delivering the Bank’s regional objective.
• Third, the Bank has increased its demand side activity
to provide information on the finance options available
to smaller businesses.
The Bank will continue to develop its strategy in the
light of market developments and emerging government
priorities.
Finally, the Bank has a rolling programme of evaluation to
measure the effectiveness of our products in improving
access to finance. Recent examples include an early
assessment of the Northern Powerhouse Investment
Fund9 and an evaluation of the UK Innovation Investment
Fund.10 These demonstrate the positive impact that the
Bank’s policies have on smaller businesses.
British Business Bank
1.1 Five years on - what has changed in small business finance markets
18
• The UK economy experienced uneven
growth in 2019
• Surveys showed business confidence was at
multi-year lows
• Investment levels and intentions remained
low in 2019
• The impact of macroeconomic
developments and political uncertainty
were reflected in SMEs’ use of short-term
finance
• The majority of SMEs expected Brexit to
have no impact on their growth or sales but
those who did were mostly pessimistic
• There has been a recent decline in concern
about political uncertainty, improving
business confidence
• The Bank will continue to monitor economic
and market developments
2016
2017
2018
2019
Per centFIG A.16
UK QUARTER ON QUARTER GDP GROWTH
Source: ONS GDP quarterly national accounts to Q3 2019
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
THE UK ECONOMY EXPERIENCED UNEVEN GROWTH
IN 2019
UK economic growth was volatile and slowed materially
during 2019. The latest Bank of England assessment of
UK economic developments attributed this slowdown
to weakening global growth as well as Brexit related
uncertainties.11
The first half of the year was one of contrasts. UK growth
in Q1 2019 got off to a strong start at 0.6% (figure A.16).
However, the ONS reported this growth was inflated by
firms stockpiling inventories ahead of the original date
the UK was expected to leave the EU. The economy then
shrank by 0.2% in Q2 driven by firms trying to wind-down
the inventories they had built up earlier in the year and
the deteriorating global economy (figure A.17). This was
the first time the UK had experienced negative quarterly
growth since 2012 and led to concern the economy may
enter a technical recession.
British Business Bank
19
Small Busines Finance Markets 2019/20
1.2 Impacts of macroeconomic developments on SME finance markets
1.2 IMPACTS OF MACROECONOMIC
DEVELOPMENTS ON
SME FINANCE MARKETS
The UK economy grew 0.4% in Q3. Services made the
strongest contribution while both construction and
production also contributed positively. This growth
eased concerns of the UK entering a recession but when
compared with the same quarter a year ago, UK GDP
increased by 1.1% in Q3 2019; this is the joint slowest
rate of quarter-on-year growth since Q1 2010. Early
estimates suggest GDP growth in Q4 is broadly flat.
Sterling has been similarly volatile in 2019 creating
uncertainty for SMEs who trade internationally, either as
exporters or importers. For example, sterling fell in
Q3 2019, predominantly due to a very weak August which
saw the average value of sterling against the Euro fall to
around €1.10 before recovering in Q4 2019 to reach
€1.20 following the election.
The labour market has remained strong, in the three
months to November UK employment was estimated at
a record high of 76.3%, 0.6 percentage points higher
than a year earlier and 0.5 percentage points up on the
previous quarter. Employment growth in the UK over
the last year has been due to an increase in full-time
jobs, up 349,000 on the year to a record high of 24.36
million, an increase in self-employment and an increase
in women entering the workforce. The unemployment
rate also fell by 0.2 percentage points on a year earlier
to 3.8% and the UK economic inactivity rate was
estimated at a record low of 20.6%, 0.4 percentage
points lower than the previous year.
Inflation has been on a downward trend since Q4 2017
when inflation hit 2.8%. It fell to its lowest rate for more
than three years in December at 1.3%. Combined with
a tight labour market this has led to both nominal and
real pay increases. Estimated average weekly earnings
growth for employees in Great Britain was 3.2% for total
pay (including bonuses), a real terms increase of 1.6%.
Looking forward, some forecasters suggest that
economic growth will pick up from 2020 onwards. For
example the Bank of England January Monetary Policy
Report forecasts GDP growth of 0.75% for 2020 rising
to 1.75% in 2022 (figure A.18). This is conditioned on a
transition to a deep free trade agreement with the EU
and the Government fiscal measures announced in the
September 2019 Spending Round. The forecasted pick
up is in significant part driven by a reduction in near-term
uncertainties following the Withdrawal Agreement.
-1
0
1
2
3
2013
2014
2015
2016
2017
2018
2019
Per centUnited Kingdom
Euro area
Major advanced
economies (G7)
FIG A.17
UK, EURO AREA AND G7 ANNUAL GDP GROWTH
Source: IMF Datamapper
FIG A.18
BANK OF ENGLAND ECONOMIC FORECAST
Source: Bank of England - January Monetary Policy Report
2019
2020
2021
2022
GDP
1.25
0.75
1.50
1.75
CPI in ation
1.50
1.50
2.00
2.25
LFS unemployment rate
3.75
4.00
3.75
3.50
British Business Bank
1.2 Impacts of macroeconomic developments on SME finance markets
20
SURVEYS SHOWED BUSINESS CONFIDENCE WAS AT
MULTI-YEAR LOWS
The impact of the macroeconomic situation on SMEs’
confidence and growth expectations throughout 2019
was explored in several surveys. The Federation of Small
Business’ (FSB) Voice of Small Business Index continued
to show weak confidence amongst SMEs throughout
2019. Confidence amongst SMEs was -21.6 in Q4 2019
(carried out just before the general election), down from
-8.1 in the previous quarter and the lowest in eight years
(figure A.19).12
There was some variation in confidence levels across
the country though no regions were positive about the
coming three months. London had the lowest confidence
in the UK at -36, jointly followed by Scotland and Wales
at -27. The North West had the highest confidence at -1.
The next highest was the South West at -15.
Further analysis of FSB data shows variation within
sectors of the economy too. The construction industry
was the only sector for which confidence was positive
in Q4, at +7. The next highest were the professional,
scientific and technical services, along with the
information and communication, sectors jointly at -10.
Manufacturing confidence fell to -17 whilst the lowest
confidence was in the accommodation and food services
at -65. Confidence in the wholesale and retail trade
sector was a little higher at -47.
The decline in manufacturer confidence has also been
shown by CBI data. According to the CBI, business
sentiment amongst SME manufacturers deteriorated
in the three months to October, falling from -28% to
-32%.13 This was the sharpest fall in optimism since
July 2016.
2017
2018
2019
FIG A.19
FSB CONFIDENCE INDEX
Source: FSB Voice of Small Business survey
-25
-20
-15
-10
-5
0
5
10
15
20
25
1.2 Impacts of macroeconomic developments on SME finance markets
21
Small Business Finance Markets 2019/20
This decline in confidence came against flat output
growth for SME manufacturers. Q3 domestic and
export orders fell by 12% and 6% respectively leading
to an overall decline in new orders of 6% with output
predicted to fall in Q4.
Other surveys also show that confidence in the
economy was low. The Recruitment and Employment
Confederation (REC) suggested that employers’ hiring
activity was subdued in 2019 compared to recent
years, though there was a small pickup in the latest
release to December.14 Furthermore, the Association of
Independent Professionals and the Self-Employed
(IPSE) survey of freelancers (zero employee businesses)
also reported confidence in the UK economy at an
all-time low.15
INVESTMENT LEVELS AND INTENTIONS REMAINED
LOW IN 2019
Business investment has been a key driver of OBR
downward growth revisions in recent forecasts. Given the
low business confidence levels it is unsurprising the ONS
business investment numbers for the first three quarters
of 2019 have remained subdued. Business investment
growth, in volume terms, was flat in Q3 following an
increase of 0.1% in Q2 (figure A.20). When compared with
the same quarter a year ago, business investment grew
by 0.5% in Q3 2019.
Looking forwards, whilst the Bank of England’s forecast
has a central projection that growth in business
investment will begin to pick up in 2020, reaching 3.5%
by 2022 (figure A.21), its latest Agents’ Summary of
business conditions reported that investment intentions
remained depressed.
2018
2019
Per centFIG A.20
UK QUARTER ON QUARTER BUSINESS INVESTMENT
Source: Oce of National Statistics to Q3 2019
-1.0
-0.5
0
0.5
1.0
1.5
-20
-15
-10
-5
0
5
10
2000 2003 2006 2009 2012
2015
2018
2021
Business investment
Bank of England forecast
FIG A.21
BUSINESS INVESTMENT GROWTH, YEAR ON YEAR CHANGE,
ACTUAL AND BoE FORECAST
Source: Bank of England January Monetary Policy Report, ONS GAN8
Per centBritish Business Bank
1.2 Impacts of macroeconomic developments on SME finance markets
22
Both the CBI and FSB surveys also ask about future
investment. The CBI survey showed the fragility of
investment intentions amongst SME manufacturers.
Across four metrics, intentions remained beneath their
long-run averages. These were training and retraining,
plant and machinery, product and process innovation and
builds. This is unsurprising given how volatile business
investment is when the macroeconomic situation
becomes less certain.
As with the CBI survey, the low confidence found in the
FSB survey is impacting SMEs’ investment plans with
the share of businesses intending to expand their capital
investment at its lowest level since 2012. According to the
FSB, in Q3 74% of SMEs did not intend on upping their
capital investment. Of this, 14% were actively planning on
reducing capital investment and 60% were planning on
maintaining their levels.
The British Chambers of Commerce (BCC) has forecast
business investment is set to decline 1% in 2019 and
0.7% in 2020. When added to the 2018 0.4% decline
this would be the longest period of annual declines in
business investment since the dotcom bubble burst. The
BCC put this down to Brexit uncertainty and the upfront
costs associated with doing business in the UK.
THE IMPACT OF MACROECONOMIC DEVELOPMENTS
AND POLITICAL UNCERTAINTY WERE REFLECTED IN
SMEs’ USE OF SHORT-TERM FINANCE
The British Business Bank’s market contacts continue
to report subdued demand for medium and long-term
borrowing among SMEs. This is in line with the Q4
BoE Agents’ summary. The soft demand for new loans
is consistent with the recent weakness of business
investment, as the current environment has reduced the
appetite among SMEs to invest for growth. SME Finance
Monitor data showed the willingness of firms to use
finance to grow and develop their business fell to 28% in
Q4 2019, from 32% in the 2018 calendar year.
At the same time the data has shown an increase in the
use of short-term finance. The Q2 2019 SME Finance
Monitor showed the use of overdrafts and credit
cards rose in the first half of 2019 to 23% and 19%
respectively, the highest since 2012. This appears to
have carried on into the latter half of the year with the
Q3 BoE Agents’ summary noting a pickup in demand for
working capital in the form of unsecured borrowing and
overdrafts to support cash flow.
Separate UK Finance data showed that the value of
overdraft facilities approved or increased declined in
Q3 2019 for second consecutive quarter (figure A.22).
However, it remained higher than in 2016 and 2017.
Previously, the value of overdraft facilities approved
or increased surged from late 2017 through 2018 to a
seven-year high. One probable explanation for the values
in Q2 and Q3 2019 being lower than in Q1 2019 and 2018
is that many SMEs had already acted to get overdraft
facilities in place.
1.2 Impacts of macroeconomic developments on SME finance markets
23
Small Business Finance Markets 2019/20
2012
2013
2014
2015
2016
2017
2018
2019
£ BillionFIG A.22
VALUE OF OVERDRAFT FACILITIES APPROVED OR INCREASED
FOR SMEs
Source: UK Finance
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
A new business opportunityPercentage of SMEsTo help the business throughtrading dicultiesTo fund expansion in the UKTo cover a short term funding gapTo invest in new plant,machinery or other equipmentTo provide additional working capital to help with day to day cash ow0
5
10
15
20
25
30
35
40
45
FIG A.23
REASONS FOR NEED FOR FUNDING OF SMEs WHO HAD
A FUNDING NEED
Source: BVA BDRC SME Finance Monitor Q2 2019, n=807 (2018) and n=377 (H1 2019)
2018
H1 2019
There are also signs that the demand for credit card
lending has held up. The Q3 2019 BoE Credit Conditions
survey reported that lenders saw an increase in the
demand for credit card lending by small businesses for
the third consecutive quarter, whilst Q4 was flat.
The value of invoice finance advanced to the smallest
businesses has also increased. Whilst a slightly lower
number of these companies are using invoice finance, the
amount they are drawing down has increased. This again
is consistent with an increased demand for short-term
finance among some businesses. Possible reasons for the
pickup in invoice finance usage is that late payments have
increased and that some SMEs are finding the current
conditions difficult, both suggesting maintaining cash
flow is proving challenging.
The SME Finance Monitor reported businesses are
increasingly citing cash flow issues as their reason for
requiring funding, while business development related
reasons have remained stable or declined. In the first
half of 2019, there were increased mentions of needing
funding for working capital to help with cashflow, to
cover a short-term funding gap or to help through
trading difficulties.
Of those SMEs identifying a need for funding in H1 2019
(4%), cashflow support was the most frequently cited
reason for needing funding, mentioned by 40% of SMEs,
up from 32% in 2018 (figure A.23). This was followed
by investing in new plant or machinery, cited by 27%,
up from 22% in 2018, which has been to some degree
linked to stockpiling activities. Over the same period,
there were fewer mentions of funding expansion in the
UK, taking advantage of new business opportunities or
taking on staff.
Bibby Financial Services’ Q3 Confidence Tracker, which
surveys 1,000 SMEs each quarter, also found nearly half
of UK SMEs (45%) suffered from some form of cashflow
problem during the quarter, up from 44% in Q2. In Q2
it reported almost a third (29%) of SMEs were actively
using funding, up from 23% in Q1. This was in line with
the SME Finance Monitor which showed a rise from 42%
to 49% in Q2.
British Business Bank
1.2 Impacts of macroeconomic developments on SME finance markets
24
Half of UK SMEs surveyed thought there would be a
recession in 2019 and were looking to address cashflow
issues, with 26% turning to credit cards, bank overdrafts
and borrowing from family and friends. Bibby cited
increasing competition, rising material costs and the
broader economy as reasons businesses appear to
be sourcing finance to cope with these challenging
conditions rather than investing for growth.
THE MAJORITY OF SMEs EXPECTED BREXIT TO HAVE
NO IMPACT ON THEIR GROWTH OR SALES BUT THOSE
WHO DID WERE MOSTLY PESSIMISTIC
The British Business Bank’s Business Finance survey,
which was carried out between the end of August
and November 2019, asked a range of Brexit specific
questions. Though a narrow majority of SMEs continued
to say it would not affect their growth (56%), those who
did were mostly pessimistic. The percentage of SMEs that
felt they would grow more (6%) or grow less (29%) as
a result of leaving the EU remained unchanged in 2019
from our 2018 survey (figure A.24).
Similarly, the majority of SMEs expected Brexit would
have no effect on sales (62%), though among those that
did the outlook was again mostly negative with 28%
expecting sales to decrease and only 5% expecting them
to increase.
The survey also asked SMEs whether they expected to
make changes to their pricing, staff numbers, investment
and exports. Of those SMEs expecting to make changes,
74% expected these to be negative. The biggest changes
were expected within pricing where 58% expected to
increase their prices (figure A.25).
Finally, our survey asked about access to finance. Here
only 39% and 35% of respondents felt that there would
be no impact on access to debt and equity respectively
though a significant percentage did not know or refused
to say (figure A.26). 37% felt debt would be more
difficult to obtain whilst 33% expected equity to be more
difficult to obtain than before Brexit. Businesses under
10 years old were the most pessimistic with 45% and
44% expecting debt and equity respectively to be more
difficult to obtain post Brexit.
Several other surveys have asked questions on the
impact of Brexit and Brexit uncertainty. A survey by Close
Brothers Asset Finance found that most SMEs (63%) felt
that the uncertainty caused by Brexit was continuing to
impact businesses’ ability to trade. The remaining 37%
had felt no difference, stating they were trading as they
were before the vote. The survey concluded that many
firms had been stockpiling while pausing their spending
and growth plans until an element of certainty returned.
No employees
Employees
All
FIG A.24
PERCENTAGE OF SMEs THAT EXPECTED TO GROW MORE OR
LESS AS A RESULT OF LEAVING EU
Source: Business Finance Survey
More
Neither
Less
Don't know/Refused
6
56
29
9
5
58
28
9
8
48
34
10
Sta numbers
Exports
Percentage of SMEs
Investment
Prices
FIG A.25
SMEs THAT HAVE MADE OR EXPECTED TO MAKE CHANGES AS
A RESULT OF THE UK LEAVING THE EU
Source: Business Finance Survey, base: all SMEs that have made or expected to make
changes as a result of the UKleaving the EU
Decrease
Increase
16
13
12
6
5
58
9
9 2
Equity
Percentage of SMEs
Debt
FIG A.26
EXPECTED IMPACT OF LEAVING EU ON DEBT AND
EQUITY AVAILABILITY
Source: Business Finance Survey
A lot more dicult
A little more dicult
No impact
A little easier
A lot easier
Don't know/Refused
13
11
22
35
4 1
27
25
39
3 1
20
1.2 Impacts of macroeconomic developments on SME finance markets
25
Small Business Finance Markets 2019/20
The sectors found to be most affected were
manufacturing and engineering, with 75% stating their
trading capability had been impacted by Brexit. The survey
went on to say those with the most exposure to Europe
were the most unsettled because they weren’t clear about
how Brexit would impact their customers, import tariffs,
supply chain and inputs. Small businesses were the least
impacted, with 60% having felt little to no difference.
Bibby Financial Services’ SME Confidence Tracker,
asked how prepared SMEs were for Brexit. Perhaps
unsurprisingly, given a similar percentage of SMEs thought
Brexit won’t impact them, it found that over half of SMEs
(54%) had done nothing to prepare for Brexit. The SMEs
that had prepared had mostly done so defensively via
building cash reserves and stockpiling goods.
The survey also noted for those operating in supply
chains had looked to manage their costs by renegotiating
with suppliers (15%) and by exploring options to manage
their exposure to currency volatility (14%). According
to the Bibby Tracker, a further 10% had applied for
Authorised Economic Operator (AEO) status. AEO
status is an internationally recognised quality mark
and can give quicker access to some simplified customs
procedures and, in some cases, the right to ‘fast-track’
your shipments through some customs and safety and
security procedures.
THERE HAS BEEN A RECENT DECLINE IN CONCERN
ABOUT POLITICAL UNCERTAINTY, IMPROVING
BUSINESS CONFIDENCE
According to the SME Finance Monitor, concerns about
political uncertainty increased steadily during 2018 (19%
for 2018 as a whole), as did concerns about the economic
climate (17% for the year as a whole) and cash flow/
late payment (13%). Only political uncertainty increased
significantly during 2019 (28% for the 3 months to
October and November) but this has reduced somewhat
in December (24%). This improvement in sentiment has
also been seen in several other recent data releases.
Amid widespread reports that the reduced political
uncertainty following the general election had a positive
impact on business and consumer spending decisions,
the seasonally adjusted IHS Markit / CIPS Flash UK
Composite Output Index rose in January (52.4), up from
49.3 in December. As a result, the headline index reached
expansion territory (above 50.0) for the first time since
August 2019. The latest reading was the highest for
almost one-and-a-half years and signalled a moderate
expansion of business activity across the UK private
sector economy.
The business optimism measure within the CBI’s
Industrial Trends survey in Q4 also improved and at the
strongest pace since 2014. Business optimism improved
significantly in the three months to January (+23%
from -44% in October), the largest swing in sentiment
(67% points) in a single quarter on record (since 1958).
Manufacturers expect total new orders to grow next
quarter (+9%), with domestic orders broadly flat (-2%)
and export orders growing slightly (+5%).
This was despite poor trading conditions over the past
quarter, with output and orders still declining. 19% of
businesses said that the volume of output rose in the
three months to January, while 33% said it was down.
In addition, total new orders dropped in the quarter to
January (-21%) at the fastest pace since the financial
crisis, with 24% of firms reporting an increase and 45%
reporting a decrease. The fall in new orders was reflected
in the quickest drop in domestic orders (-21%) since the
financial crisis. While export orders also fell, it was at a
slower pace than the previous quarter (-10% from -24%
in October).
Finally, the latest survey of UK Chief Financial Officers
shows an unprecedented rise in business sentiment.
The fourth quarter survey took place in the wake of the
UK general election, between 13th December and 6th
January. Confidence has seen the largest increase in the
11-year history of the survey taking it to its highest ever
level. CFO perceptions of external uncertainty have fallen
from one of the highest ever readings to near-average
levels. Deloitte reported that “the bounce in CFO spirits
extends beyond political factors, with concerns about US
protectionism, weakness in the euro area and financial
bubbles easing.”
THE BANK WILL CONTINUE TO MONITOR ECONOMIC
AND MARKET DEVELOPMENTS
The British Business Bank stepped up monitoring of SME
finance markets in the run up to Brexit. Whilst the UK has
now exited the EU and has entered the transition period,
close market monitoring will be continued, and the Bank
stands ready to respond should it be required.
British Business Bank
1.2 Impacts of macroeconomic developments on SME finance markets
26
• External finance is a key part of
entrepreneurial ecosystems
• A number of indicators are pointing to a
slowdown in entrepreneurial activity
• Early stage finance flows also appear
to be slowing
• The slowdown in entrepreneurial activity
is apparent across much of the UK
• Strengthening regional ecosystems
will help address SME finance market
imbalances
• The Bank is working with partners to
understand and further strengthen
ecosystems across the whole of the UK
The way that researchers, policy makers and business
leaders seek to understand entrepreneurial activity
has gone through significant change in the past twenty
years. In the early 2000s many viewed entrepreneurship
either as an individual process of discovery, where pre-
existing entrepreneurial opportunities were found, or
of creation, where opportunities didn’t exist until able
entrepreneurs invented them.16
In recent years, a more realistic, middle ground has
emerged, acknowledging that aspects of both creation
and discovery are part of entrepreneurship.17 This modern
view of entrepreneurship explicitly places entrepreneurs
in their wider context, most notably through the concept
of entrepreneurial ecosystems.18
EXTERNAL FINANCE IS A KEY PART OF
ENTREPRENEURIAL ECOSYSTEMS
Entrepreneurial ecosystems include a variety of entities
connected through relationships and processes that
influence entrepreneurial outcomes. Figure A.27 presents
a stylised example of the kinds of actors and linkages
that make up an ecosystem.
British Business Bank
27
Small Busines Finance Markets 2019/20
1.3 Finance in entrepreneurial ecosystems
1.3 FINANCE IN
ENTREPRENEURIAL
ECOSYSTEMS
At the very centre is the business population which is
going through a continual process of churn from births,
deaths, expansions and contractions. Businesses
interact with each other through rivalries or customer-
supplier relationships but are also linked with the wider
ecosystem. External finance is a key part of this.
FIG A.27
ENTREPRENEURIAL ECOSYSTEM SCHEMATIC
Source: British Business Bank drawing on multiple sources19
FIG A.3.1
ENTREPRENEURIAL ECOSYSTEM SCHEMATIC
Source: British Business Bank drawing on multiple sources[1]
[1]Isenberg (2011) The entrepreneurship ecosystem strategy as a new paradigm for economic policy: Principles for cultivating entrepreneurship,
http://www.innovationamerica.us/images/stories/2011/The-entrepreneurship-ecosystem-strategy-for-economic-growth-policy-20110620183915.pdf
and SQW (2019) Entrepreneurial University Eco-Systems
Investors
Financial
Institutions
Business
Leaders
Public
Institutions
Educational
Institutions
Human
Capital
Other
Actors
Business
Service
Firms
New
Firms
Ongoing
Firms
Founders
Other EcosystemsCulture, Infrastructure, Amenities
At the most basic level, the formation and growth of new
firms creates demand for finance. Simultaneously the
supply of finance facilitates firm formation and growth.
Such dependencies are common in entrepreneurial
ecosystems and mean that changes in outcomes can
ripple though the system.
British Business Bank
1.3 Finance in entrepreneurial ecosystems
28
A NUMBER OF INDICATORS ARE POINTING TO A
SLOWDOWN IN ENTREPRENURIAL ACTIVITY
Since the Bank’s formation in 2014, UK early stage
entrepreneurial activity has been healthy and finance
markets have been improving. There are, however,
emerging signs of a slowdown in the early stage activity
that is central to entrepreneurial ecosystems. This
slowdown is likely to be partly associated with the
prolonged period of uncertainty UK entrepreneurs have
been facing and is apparent in multiple indicators.
The first example is the UK’s total entrepreneurial activity
(TEA) rate. This has declined for a second consecutive
year in 2018 according to the Global Entrepreneurship
Monitor (figure A.28). The TEA rate is the share of the
population currently founding a business or running a
business that has existed for less than 42 months. Both
components dropped slightly in 2018, meaning total
entrepreneurial activity is more than two percentage
points down from the peak in 2012. This trend is not
mirrored in France or Germany, where the TEA rate has
remained relatively stable since 2012, nor in the United
States where activity has increased by nearly three
percentage points since 2012. These recent trends mean
the UK TEA rate now lags that of the United States by
almost eight percentage points but remains above the
levels seen in France and Germany.
The Global Entrepreneurship Monitor also tracks the
share of early stage entrepreneurs that expect their
venture to have employment growth of at least 50%
over five years. This too has declined in recent years with
only 16% of early stage entrepreneurs having such high
expectations, down from over 20% in the early 2000s.20
ONS data on registered firm birth rates also show a
decline in 2018 (figure A.29). The 12.9% UK birth rate is
the lowest since 2012. The biggest absolute reductions
in firm births were in administrative and support service
activities (3,300 fewer births in 2018), construction
(3,000 fewer births) and professional, scientific and
technical activities (2,600 fewer births).
The recent strength of UK labour markets could be a factor
in this trend and given that the Global Entrepreneurship
Monitor suggests business set-up activity has declined in
2018, birth rates could drop further in 2019.
Hidden within the population of new firms are a small
number of university spinouts.21 The number formed in
2017/18, the latest year covered by data from the Higher
Education Statistics Agency, is 2% down. Spinouts are
innovative by definition and have historically been over-
represented in equity deals, reflecting their high growth
potential, so dropping spinout formation could add to
potential concerns.
0
2
4
6
8
10
2014
2012
2010
2016 2018
2002 2004 2006 2008
Per centFIG A.28
TOTAL ENTREPRENEURIAL ACTIVITY RATE FOR THE UK
Source: British Business Bank analysis of the Global Entrepreneurship Monitor
0
2
4
6
8
10
12
14
16
18
20
2014
2012
2010
2016
2018
2004
2006
2008
Per centFIG A.29
ENTERPRISE BIRTH RATE
Source: British Business Bank analysis of ONS Business Demography
UK
Range of English regions, Scotland,
Wales and Northern Ireland
1.3 Finance in entrepreneurial ecosystems
29
Small Business Finance Markets 2019/20
EARLY STAGE FINANCE FLOWS ALSO APPEAR TO
BE SLOWING
Entrepreneurial ecosystems are characterised by
complex dependencies and interactions. It is, therefore,
unsurprising that this slowdown in entrepreneurial
activity appears to be accompanied by declining flows of
early stage finance.
In the bank lending market there is some evidence of
muted flows of finance. Gross lending is down in 2019
on the previous year leaving flows significantly down in
real terms relative to 2015 (see sections 1.1 and 2.4).
We do not have data on loan purposes at the market-
level, but data from the Bank’s latest Finance Survey
suggests the slowdown in early-stage activity is playing
a part in the decline in lending.
In 2018 starting a business was one of the top five most
commonly cited reasons for seeking finance. A smaller
share of firms cited starting up as one of their motivations
for seeking finance in the 2019 survey. This contrasts
with the shares of firms mentioning working capital,
asset purchases and product development as one of their
reasons which all stayed stable or increased (figure A.30).
The 2019 Business Finance Survey provides further
context on this, suggesting that 16% of businesses up
to five years in age had wanted to apply for external
finance but had been stopped by something. Only 5% of
firms aged 10 years or more report the same experience,
a significant difference. Reasons cited include fear of
rejection, not wanting to take on risk and concerns about
economic conditions.
The 16% figure is the highest since the question was
introduced in 2017 and could provide some evidence that
changing attitudes among young firms are contributing
to the current slowdown in bank lending.
There are also signs of slowing in early stage equity
finance. Full-year data for 2019 is not yet available,
but extrapolation suggests both the number of seed
deals and the number of new companies getting their
first seed deal will remain below historic peaks in 2019
(figure A.31).
2013 2014 2015 2016 2017 2018 2019
2012
2011
Seed Deals
New Seed Recipients
FIG A.31
SEED STAGE EQUITY ACTIVITY
Source: British Business Bank analysis of Beauhurst
Note: 2019 values extrapolated from three quarters of data
0
100
200
300
400
500
600
700
800
900
NumberSimple extrapolation
Per cent0
10
20
30
40
50
FIG A.30
MAIN REASONS FOR SEEKING FINANCE
Source: British Business Bank 2019 and 2018 Business Finance Surveys – Ipsos MORI.
Base = all businesses who sought  nance in the last three years (n=755 and 913)
Note: 2019 Survey has slightly di†erent wording for 'develop new product / service'.
Reasons shown were the 5 most popular in 2018
2018
2019
Starting up your businessDevelop new product / serviceTo fund expansion e.g.Marketing campaignPurchase of xed assets such asmachinery, vehicles or buildingsWorking capital/cash ow/day to day cost/expensesBritish Business Bank
1.3 Finance in entrepreneurial ecosystems
30
There is a similar slowdown in the number of companies
submitting advance assurance requests (AARs) for the
Enterprise Investment Scheme (EIS) and Seed Enterprise
Investment Scheme (SEIS) in 2018/19 (figure A.32). AARs
are a discretionary part of the process for seeking EIS or
SEIS investment so falling levels may feed through into
reduced EIS and SEIS investments in subsequent years.
Some of the drop in AAR numbers is likely to be associated
with the risk-to-capital condition added to the schemes
following the Patient Capital review and with revised
HMRC processes.22 Though these factors may explain part
of the decline, falling AAR volumes add to the pattern of
slowing early stage entrepreneurial activity.
THE SLOWDOWN IN ENTREPRENEURIAL ACTIVITY IS
APPARENT ACROSS MUCH OF THE UK
The indicators above are national figures but these
trends appear to be fairly broad-based. For example,
2018 enterprise birth rates are between 1.5 and 3.5
percentage points down from peak levels in Scotland,
Wales, Northern Ireland and the nine English regions
(figure A.29).
These reductions equate to sizeable declines in the
number of new firms formed in each part of the UK.
Relative to peak birth rates, the slower rates of firm
formation seen in 2018 equate to 1,000 fewer firm births
in Northern Ireland, where the business population is
lowest. This increases to 16,000 fewer births in London
which has the largest stock of firms.
The decline in lending is also fairly consistent. UK
Finance data suggest that numbers of loan and overdraft
approvals are below historic averages in every part of
the UK. Similarly, early stage equity activity looks muted
across the board with Yorkshire and the Humber the only
part of the UK that looks likely to see a record number of
new companies raising seed equity funds in 2019.23
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2006-07 2007-08 2008-09 2009-102010-112011-122012-132013-142014-152015-162016-172017-182018-19EIS
SEIS
FIG A.32
COMPANIES SEEKING ADVANCED ASSURANCE FOR EIS AND
SEIS INVESTMENT
Source: British Business Bank analysis of HMRC EIS and SEIS Data
1.3 Finance in entrepreneurial ecosystems
31
Small Business Finance Markets 2019/20
STRENGTHENING REGIONAL ECOSYSTEMS WILL HELP
ADDRESS SME FINANCE MARKET IMBALANCES
The slowing in early stage entrepreneurial activity and
related finance flows could have important implications
for entrepreneurial ecosystems in the UK. Mature
ecosystems that are packed with diverse participants
linked through strong connections are likely to be more
resilient to adversity than emerging ecosystems with
lower densities and weaker ties.24 Any differences in
resilience could mean leading and lagging ecosystems
diverging further.
The UK hosts multiple overlapping entrepreneurial
ecosystems ranging from small, emerging ecosystems
to huge, globally-significant ecosystems. The following
passages illustrate how ecosystem characteristics may
interact with the slowdown in early stage entrepreneurial
activity by using three example ecosystems; London,
Bristol and Nottingham. These examples could never
cover the diversity of all the ecosystems in the UK
but analysing these examples should help show how
ecosystem characteristics vary and explain the potential
impacts of this variation.
London is consistently viewed as the UK’s strongest
entrepreneurial ecosystem so its inclusion illustrates
the characteristics of a globally-leading ecosystem.
Bristol and Nottingham are both successful ecosystems
with thriving business populations too, but at smaller
scales than London. They both have different strengths
and are based in different regions of the UK so their
inclusion should help point to some of the challenges and
opportunities in non-London ecosystems.
Starting at the centre of the ecosystem by looking at
firms, we can see that the UK has huge variations in
business density. London’s business density is greater
than Bristol and Nottingham’s at every point in the
distribution and some parts of central London host
upwards of 10,000 businesses per square kilometre
(figure A.33). This business density fosters connections
between firms that can buy, sell and learn from each
other and is unrivalled in other parts of the UK.
Even with business birth rates slowing, the sheer scale
of the London ecosystem means there were still 97,000
new businesses registered in London in 2018 which will
help maintain demand for business service firms that
cater for start-ups.
10
20
30
40
50
60
70
80
90
100
0
1
10
100
1,000
10,000
Businesses per km2 (Log Scale)London
Bristol
Nottingham
FIG A.3.7
BUSINESS DENSITY OF SELECTED AREAS
Source: British Business Bank analysis of ONS UK Business Counts in 2019
Density Percentile
FIG A.33
BUSINESS DENSITY OF SELECTED AREAS
Source: British Business Bank analysis of ONS UK Business Counts in 2019
Note: Chart plots business density of Middle Layer Super Output Areas in
Greater London, Bristol plus bordering local authorities and Nottingham plus
brdering local athorities 25
British Business Bank
1.3 Finance in entrepreneurial ecosystems
32
In a smaller, less dense ecosystem, a persistent slowing
in firm birth rates could shrink the market for start-up
services below a viable absolute size. Ecosystems where
this happens could become less attractive for future
start-ups. This could create a reinforcing effect that may
only dissipate over time as commercial rents fall enough
to offset these disadvantages.
Business service firms, whether focused on serving start-
ups or more established business, are vital for ecosystem
health and development.26 These firms act as connectors
in an ecosystem. For example, our 2019 Business Finance
Survey demonstrates that accountants were the most
popular source of external advice for firms applying for
finance. Firms report that accountancy advice didn’t just
influence their choice of finance type but of specific
provider too, highlighting their connecting role.
As with the general business population, London also
has far greater density of business support firms such as
management consultancy, accountancy firms and legal
firms than our comparator ecosystems (figure A.34).
Having a greater density of business service firms should
allow them to specialise in serving certain businesses
in different sectors or with different needs. This
specialisation is likely to improve the services they can
offer creating benefits for client businesses.27
FIG A.34
BUSINESS DENSITY OF SELECTED AREAS – BUSINESS SERVICE FIRMS
Source: British Business Bank analysis of ONS UK Business Counts in 2019 28
Lowest Density
Highest Density
London
Nottingham
Bristol
Business service firms aren’t the only important
connectors within entrepreneurial ecosystems. Equity
investors, business incubators and business accelerators
are also key connectors.
Equity investors provide funds but also help connect
firms with talent, whether at staff or board level, and
with potential corporate customers. This linking effect of
equity investors is apparent in many of the Bank’s equity
programmes. For example the Northern Powerhouse
Investment Fund early assessment report sets out a case
study where a fund manager found a technical expert to
act as a Non-Executive Director for their investee firm.29
In addition to equity investors linking their portfolio
firms to others, links from prospective portfolio firms to
investors are important. Around two fifths of pitchdecks
that reach VC firms come from a pre-existing relationship
but these warm leads eventually account for over four
fifths of investments.30 One specific inward link that
appears important is having a director with previous
experience of raising equity finance. Firms in this position
are significantly more likely to obtain equity finance than
their peers.31
1.3 Finance in entrepreneurial ecosystems
33
Small Business Finance Markets 2019/20
Equity investors plan for eventual exits from their
investments through initial public offerings, trade
sales and secondary sales. Exits are a key process in
entrepreneurial ecosystems as they drive investor
returns and provide liquidity to limited partners, freeing
up capital for future investments. Exits also create wealth
for company founders, enabling them to found new
ventures, invest in other firms or share their expertise.
This process is often called entrepreneurial recycling32
and will play a role in the substantial variation in the
presence of equity investors we see in the UK.33 Again
London is significantly better stocked than the rest of
the UK including our comparator ecosystems (figure
A.35). This strong presence of VC investors in London
appears to filter down to firms considering raising
equity as just 27% of London firms in this position view
a lack of suitable investors in their local area as a barrier.
This is comfortably below the 40% of firms in the UK
overall that have considered raising equity but view the
lack of investor presence as a barrier according to the
latest Business Finance Survey.
There is a similar pattern for the locations of incubators
and accelerators. Incubators and accelerators both aim
to support businesses through their earliest stages
of growth. They use a range of approaches such as
providing physical space, mentoring, training and funding.
Incubators tend to be open-ended with looser selection
criteria and rent-based funding. Accelerators are generally
time-limited programmes and often take equity stakes in
attendee firms as part of their funding arrangements.34
FIG A.35
VENTURE CAPITAL INVESTOR LOCATIONS
Source: British Business Bank analysis of PitchBook Investor Information as of mid-2019
Nottingham
Bristol
London
British Business Bank
1.3 Finance in entrepreneurial ecosystems
34
As of the last comprehensive data gathering exercise
in 2017, London hosted over 180 incubators and
accelerators. This was 30% of the UK total, a notably
higher share than the 19% of UK businesses in the
capital. Bristol and Nottingham hosted 10 and seven
incubators and accelerators, respectively, fewer than
seven individual London boroughs35 (figure A.36).
Incubators and accelerators are particularly revered
ecosystem connectors. Most participant firms view
the contribution of the incubator or accelerator
they attended as significant or vital to their success.
Programme features that appear to be strongly related to
positive outcomes include access to investors and peers,
help with team formation, direct funding, and mentoring
by a business angel, venture capitalist or industry expert.
Non-attendee firms also appear to benefit as there is
evidence of spillover benefits in the form of increases in
the number and value of equity investments for non-
attendee firms.36
Major banks and other large corporates increasingly
sponsor their own incubators and accelerators. This
arrangement can have benefits for both parties. Attendee
firms can potentially access their sponsor’s networks
alongside the network of peers formed through the
programme. Sponsors gain awareness of innovations that
attendees develop, and they may even take small equity
stakes too.37
These forms of sponsorship have some similarity
to the concept of anchor tenants in entrepreneurial
ecosystems. Anchor tenants are large firms that
undertake significant research and development of their
own but also absorb innovations from other entities.
Anchor tenants were originally viewed as helping the
absorption and use of university-derived innovation.
Through sponsoring incubators and accelerators this
absorption can expand to innovative firms without
university links. This is particularly true where the
sponsor select participants working on innovations
relevant to their own business model.
FIG A.36
INCUBATOR AND ACCELERATOR LOCATIONS
Source: British Business Bank analysis of BEIS Incubator and Accelerator Directory, 2017
Nottingham
Bristol
London
1.3 Finance in entrepreneurial ecosystems
35
Small Business Finance Markets 2019/20
London
Gloucestershire,
Wiltshire and
Bath/Bristol area
Derbyshire and
Nottinghamshire
Rest of the UK
Per cent
FIG A.3.11
SERVICE EXPORTS AS A PROPORTION OF GROSS VALUE ADDED
Source: British Business Bank analysis of ONS Service Exports, 2016
0
10
20
30
FIG A.37
SERVICE EXPORTS AS A PROPORTION OF GROSS VALUE ADDED
ource: British Business Bank analysis of ONS Service Exports, 2016
Nte: Char plots data for NUTS2 regions 40
Universities are another prevalent sponsor of incubators
and accelerators. University involvement can create a
direct route for spinouts to participate in accelerators or
incubators and may be part of overarching technology
transfer strategies.
In addition to connections within ecosystems like
incubators and accelerators, connections to other
ecosystems also support ecosystem strength and
resilience. Equity investors are a good illustration of this
too as VC firms often invest in companies outside their
home ecosystem. For London firms, over 20% of deals
since 2011 have been confirmed as involving overseas
investors while the share is much lower at around 10%
for Bristol, Nottingham and the rest of the UK.
Some evidence suggests that companies backed by
cross-border VC investors experience stronger long-term
growth even when compared to other VC-backed firms
where the backers are all domestic. Part of this is likely
to be associated with the linking effects that can help
portfolio businesses to internationalise.38
External connections to customers are also an important
link to other ecosystems and again London has notable
strength. Service exports make up a far higher share of
gross value added in London than the rest of the UK and
our two comparator ecosystems (figure A.37). London is
particularly strong in exports of financial and information
and communication services, accounting for more than
50% of the UK total in both.
Exporting doesn’t just provide firms with new markets, it
can also boost productivity. Recent evidence based on UK
firms identifies a clear learning-by-prior-exporting effect
on productivity that further highlights how external links
can benefit an ecosystem.39
Given London’s position as the leading UK ecosystem it
is not surprising it has unparalleled internal connectivity
from its incredible business density, its huge stock
of incubators and accelerators and its population of
investors. London also has strong external connections
with high levels of equity investments involving overseas
funds and significant volumes of service exports.
London’s characteristics are so strong that the 2019
Global Startup Ecosystem report placed London as one
of only four global ecosystems in what they call the
integration phase.41 The authors describe ecosystems in
the integration phase as having a self-sustaining degree
of global connectedness that keeps firms at the forefront
of technological and business model innovation.
British Business Bank
1.3 Finance in entrepreneurial ecosystems
36
The Bank is also involved in an ongoing pilot aiming to
enhance ecosystems in the Metro Mayoral Authorities of
Greater Manchester, the West of England and the West
Midlands. This DCMS-led project, focusing on scaling
businesses in the creative industries (CI), is taking an
innovative ‘dual’ demand and supply approach, which is
locally developed and driven. This provides both intensive
business support to CI businesses to enhance investment
readiness (demand) and investor network and capacity
building (supply), with the ultimate goal of unlocking
growth finance for CI businesses. The Bank will take ‘what
works’ findings forward from this work, across the range
of programme elements being tested, such as stimulating
the process of entrepreneurial recycling, by encouraging
successful entrepreneurs to become angel investors.
This local involvement in design and delivery is part of
the Bank’s regional funds too and helps align activity with
ecosystem characteristics.
Allied to our efforts to improve connectivity, we are
also bringing new players and additional funds to
entrepreneurial ecosystems. Our regional funds, the
Northern Powerhouse Investment Fund, the Midlands
Engine Investment Fund and Cornwall and Isles of
Scilly Investment Fund, have brought established fund
managers into new regions, providing their value-adding
expertise to the ecosystem as well as channelling
additional funds, including from private sector sources,
toward exciting companies.
At a national level, the Bank is exploring what can be
done to support early stage entrepreneurial activity,
including the types of innovative concept-building
research that can create spinouts. At present potential
entrepreneurs at the very earliest stages of developing
new technologies or products are primarily dependent on
grants for research and development. When this funding
is no longer suitable the high cost of due diligence,
relative to the small investment sizes and high risk,
is often prohibitive preventing equity investors from
stepping in.
This is just one example of a potential blockage affecting
early-stage entrepreneurial activity. Our plans for 2020
also include undertaking new primary research on the
entrepreneurial development process, specifically aiming
to understand the blockages that may face female or
ethnic minority entrepreneurs. This research will report
later in the year and will support the Bank’s continued
commitment to enabling entrepreneurship for everyone
in the UK.
Alongside London in the integration phase are Silicon
Valley, Boston and New York. Silicon Valley is ranked at
the top of all the ecosystem pillars used in the report,
but London matches the Valley, outranking Boston and
New York, on market reach and connectedness.42 These
world-leading strengths mean the London ecosystem is
well-placed to withstand the current slowdown in early
stage activity though we cannot be complacent.
Ecosystems in the rest of the UK have their own
strengths too as our comparators have demonstrated.
Nottingham and Bristol have many desirable features
that the preceding text has covered such as the presence
of multiple incubators, accelerators and VC investors
nearby. These ecosystems also have strengths not
covered in this report that create resilience. Examples
include the presence of leading universities and major
international firms. It is also true that London’s global
position benefits other UK ecosystems with links into the
capital, including our comparator ecosystems.
THE BANK IS WORKING WITH PARTNERS TO
UNDERSTAND AND FURTHER STRENGTHEN
ECOSYSTEMS ACROSS THE WHOLE OF THE UK
While never taking London’s global position for granted,
the Bank is working with partners to understand and
further strengthen ecosystems across the whole of the
UK. We have a range of existing activities and are using
our regional intelligence to set a long-term strategy.
In the past year the Bank’s UK Network have had over
1,000 meetings with stakeholders across the breadth
of the UK. Our contacts range from accountancy
firms to Local Enterprise Partnerships (LEPs) to trade
associations and beyond. What links them all is the
connecting role they play in their respective ecosystems,
something we are aiming to strengthen by connecting
the connectors. For example, in the last year we have
brought together access to finance experts working in
neighbouring LEPs to share knowledge. In the coming
year we will launch our Regional Partner programme
through which we will recruit organisations to help boost
connectivity in their ecosystems through improving
coordination and collaboration.
1.3 Finance in entrepreneurial ecosystems
37
Small Business Finance Markets 2019/20
• UK business population increased to 5.9
million at the start of 2019
• Growth in unregistered firms exceeded
growth in registered firms
• Early indicators suggest the number of new
businesses registering for VAT throughout
2019 has been stable
• The incidence and growth of smaller firms
varies by location and sector across the UK
This section reviews the most recent changes in the
UK SME business population together with spatial
and sectoral variations, using the latest BEIS business
population estimates and ONS business demography
data. The section also draws on new data published
as part of the ONS ‘Faster indicators of UK economic
activity’ initiative, launched in April 2019. These
indicators include the number of new VAT reporters,
providing a proxy for firm births (at the threshold level
of £85,000 taxable turnover).43
British Business Bank
38
2.1 SME business population
2.1 SME BUSINESS
POPULATION
UK BUSINESS POPULATION INCREASED TO 5.9 MILLION
AT THE START OF 2019
There were 5.9 million private sector firms in the UK at the
start of 2019, an increase of 3.5% from 2018 (figure B.1).
These firms are comprised of 5.82 million small businesses
(0-49 employees), 35,600 medium-sized businesses
(50-249 employees) and 7,700 large businesses with
250 or more employees. Taken together, smaller
businesses (0-249 employees), which comprise 99%
of firms, contribute £2.2 trillion in turnover to the UK
economy and account for 52% of private sector turnover.
They also employ 16.6 million employees, comprised of
12.2 million workers and 4.4 million working proprietors -
61% of the private sector workforce and 48% of the total
workforce (which includes central and local government
and non-profit organisations).44
BEIS business population estimates provide numbers
for private sector businesses at the start of the year, by
combining estimated counts for unregistered businesses
(those that are not VAT and/or PAYE registered) with
data on registered businesses derived from the ONS
Inter Departmental Business Register. The estimates are
published 10 months after the reference point and reflect
business activity in the preceding year (employment)
or earlier (turnover data is based on VAT returns for the
12-month period ending December 2017 or January/
February 2018).45 This section compares the latest
business counts from January 2019 with counts from
January 2018.
GROWTH IN UNREGISTERED FIRMS EXCEEDED GROWTH
IN REGISTERED FIRMS
Growth, in both absolute and percentage terms, was
highest amongst unregistered firms with no employees
rising by 4.9% to 3.25 million, reversing the 1.2% decline
at the start of 2018 (figure B.2).
The number of zero employee registered firms also
grew (2.4%) to 1.21 million in 2019, reversing the 1%
reduction in numbers reported in 2018. The number of
registered employers grew by 1.5% to 1.41 million in
2019, slightly below the 1.6% growth rate recorded in
the previous year.
2013 2014 2015 2016 2017
2018 2019
2012
2011
MillionsNo employees (unregistered)
No employees (registered)
Employers
FIG B.1
UK BUSINESS POPULATION
Source: BEIS, Business population estimates
0
1
2
3
4
5
6
All rms
Unregistered
Registered
Zero employee rms
All employers
MillionsPer centFirms 2019 (LHS)
2018-19 change (RHS)
FIG B.2
UK BUSINESS POPULATION, NUMBER OF BUSINESSES
AND GROWTH
Source: BEIS, Business population estimates
0
1
2
3
4
5
6
0
1
2
3
4
5
6
2.1 SME business population
39
Small Business Finance Markets 2019/20
The rate of registered business formation, as measured
by the ONS, has exceeded that for business closures in
every year since 2011. The business birth rate (number
of new business registrations for VAT or PAYE as a
share of the business population) peaked at 14.6% in
2016. However, the 12.9% birth rate in 2018 (the latest
available data) was the lowest reported in six years and
is slightly down on 2017 (13.1%). The number and rate of
business closures (as a share of the business population)
also decreased to 11.4% in 2018, from 12.2% in 2017
(figure B.3).46 The result of these changes is a widening
gap between firm births and deaths and a net increase in
the stock of registered businesses.
Despite this, growth in the number of new registered
businesses over 2018 (both zero employee registered
firms and employers) remained somewhat subdued
when compared to that of non-registered firms. There
are several possible reasons for this including the
expansion of Intermediaries Legislation (IR35), which
introduced rules aimed at making sure workers providing
services through intermediaries pay the same tax and
NICs as employees would. This was initially applied to
public sector intermediaries and as of April 2020 will
also be applied to private sector intermediaries. The
ONS highlighted that a decline in new firm registration
in the education and health sector in 2018 coincided
with the introduction of IR35 (introduced in April 2017).
Further potential reasons for the decline in new firm
registrations are discussed in section 1.3: Finance in
entrepreneurial ecosystems.
BEIS data also breaks SMEs with employees into
headcount cohorts. As at 2019, there were almost 1.16
million micro (1-9 employee) firms (82% of all private
sector employers). The number of micro firms grew
by 1.6% to 2019, slightly below the growth rate of
1.7% recorded to 2018, whilst the growth rate of small
firms (10 to 49 employees) has remained below 1% in
both periods. Medium and large employers recorded
growth rates of 2.3% and 2.7%, respectively, to 2019,
somewhat below the 2.7% and 4.2% growth rates
recorded in the previous year (figure B.4).47
0
5
10
15
20
2013 2014 2015 2016 2017 2018
2010 2011 2012
Per centBirths
Deaths
FIG B.3
UK NEW FIRM STARTS (BIRTHS) AND CLOSURES (DEATHS)
* births and deaths as % of active businesses in each year
Source: ONS, Business Demography
(1-9)
Micro
(10-49)
Small
(50-249)
Medium
(250+)
Large
ThousandsPer centFirms 2019 (LHS)
2018-19 change (RHS)
FIG B.4
UK EMPLOYERS, NUMBER OF BUSINESSES AND GROWTH
Source: BEIS, Business population estimates
0
200
400
600
800
1,000
1,200
0
1
2
3
4
5
6
British Business Bank
2.1 SME business population
40
EARLY INDICATORS SUGGEST THE NUMBER OF NEW
BUSINESSES REGISTERING FOR VAT THROUGHOUT
2019 HAS BEEN STABLE
The ONS has recently introduced a range of faster
indicators of UK economic activity, including the
publication of the number of new businesses that have
registered for VAT in the period. These “first reports”
from firms that have attained the mandatory threshold
in turnover to make a VAT return, or that have voluntarily
registered, provide a proxy birth rate for registered
enterprises and “relate to the overall creation and increase
of business activity in the economy.”48 The average of
61,000 new reports per quarter recorded in 2019 was
below the peak of 65,000 in 2016 (figure B.5). While there
has been relative stability in this timely measure since the
middle of 2017, new VAT reports measure just one aspect
of entrepreneurial activity and indicators of potential
entrepreneurial slowdown are explored further in section
1.3: Finance in entrepreneurial ecosystems.
THE INCIDENCE AND GROWTH OF SMALLER FIRMS
VARIES BY LOCATION AND SECTOR ACROSS THE UK
Growth rates in the number of firms to 2019 for UK
regions and devolved nations were generally higher
than those recorded in the previous year, with a few
exceptions (figure B.6). The North East had the highest
growth in business numbers to 2018 (14%), but the
highest decline in numbers to 2019 (-6.9%). The East
Midlands saw a decline in both 2018 and 2019 (-0.8%
and -3.1% respectively). Northern Ireland also saw a
decline to 2019 (-6.5%) after growth of 0.8% to 2018.
London recorded a marginal reduction to 2019 (-0.4%).
0
20
40
60
80
2013 2014 2015 2016 2017 2018 2019
2010 2011 2012
ThousandsNew VAT reports (quarter) seasonally adjusted
FIG B.5
UK QUARTERLY NEW VAT REPORTS (PROXY BIRTH RATE)
Source: ONS, Data Science Campus
ThousandsPer centFIG B.6
UK SMALLER FIRMS AND CHANGE, BY ENGLISH REGION AND
DEVOLVED NATION
Source: BEIS, Business population
-800
-600
-400
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
LondonSouth EastEast of EnglandNorth WestSouth WestWest MidlandsEast MidlandsNorth EastScotlandWalesYorkshire & the HumberNorthern Ireland-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
Firms 2019 (LHS)
2018-19 change (RHS)
2.1 SME business population
41
Small Business Finance Markets 2019/20
Services continue to comprise both a greater share of the
stock of firms and contribution to the net annual growth
rate of the private sector business population than the
primary and secondary sectors (figure B.7).49, 50 The highest
growth rates to 2019 were recorded in Transportation and
Storage, Accommodation and Food Services, Education,
Professional, Scientific and Technical, and Financial
Services. Whilst Manufacturing, Real Estate and Wholesale
and Retail recorded a net reduction to 2019, these sectors
had all recorded growth in the number of firms in the
previous year.
ThousandsPer centFIG B.7
UK SMALLER FIRMS AND CHANGE, BY SECTOR
* Motor vehicle repair included in wholesale and retail
Source: BEIS, Business population
Agriculture, Forestry and FishingMining and Quarrying; UtilitiesManufacturingConstructionProfessional, Scienticand TechnicalWholesale and Retail*Administrative andSupport ServicesInformation and CommunicationHuman Health and Social WorkTransportation and StorageOther ServicesEducationArts, Entertainmentand RecreationAccommodation and FoodReal EstateFinance and InsuranceFirms 2019 (LHS)
2018-19 change (RHS)
-1,500
-1,000
-500
0
500
1,000
-15
-10
-5
0
5
10
15
Primary and secondary sectors
Services sector
The contribution smaller businesses make to the UK
economy and employment, wherever they’re based and
whichever sector they’re in, demonstrates the importance
of the British Business Bank’s focus on making finance
markets working better for them. Reflecting the diversity
of the smaller business population in terms of size, age,
sector and location, the Bank supports a range of finance
solutions from debt to equity across the UK, enabling
smaller businesses to find the right type of finance
for them.
British Business Bank
2.1 SME business population
42
• Use of finance reached its highest level
since 2012, driven by short-term finance
types and working capital needs
• Reluctance to use long-term finance
continued and application rates remained
historically low, meaning businesses
could be forgoing growth
• Barriers to using some types of finance
persisted, including a lack of awareness
and reluctance to give up control
• Many smaller businesses still rely on
their own experience when considering
finance options
• Over a third (36%) of SMEs use trade credit,
reducing the need for external finance but
highlighting vulnerability to late payments
This section highlights current usage of external finance,
attitudes to finance and trends in debt applications,
drawing on the latest available data from BVA BDRC’s SME
Finance Monitor, the British Business Bank’s Business
Finance Survey and BEIS’ Longitudinal Small Business
Survey.51 The definition of external finance used excludes
trade credit, which is discussed separately at the end of
the chapter.
USE OF FINANCE REACHED ITS HIGHEST LEVEL SINCE
2012, DRIVEN BY SHORT-TERM FINANCE TYPES AND
WORKING CAPITAL NEEDS
The share of businesses using external finance peaked at
around half (49%) in Q2 2019, a significant increase from
36% in 2018. The share of finance users outnumbered
‘Permanent non-borrowers’ (PNBs), for the first time
since 2014 and by 12 percentage points (figure B.8).52
However, use of finance declined to 43% at the end of
2019, with the share of PNBs (45%) now slightly higher
than finance users according to the latest available data
(Q4 2019).53
43
2.2 Use of external finance
2.2 USE OF EXTERNAL FINANCE
Small Business Finance Markets 2019/20
The increase in use of finance over the first half of
2019 was driven by smaller businesses (those with
fewer than 10 employees). The share of 0 employee
businesses and those with 1-9 employees using finance
peaked at 46% and 57% respectively in Q2 2019,
from 34% and 42% in 2018. These smaller businesses
are significantly more likely to require funding for
short-term cashflow related reasons (of the 4% who
identified a need for funding, 51% of 0 employee
businesses’ funding need was cashflow related,
compared to 34% of 50-249 employee businesses).54
Use of ‘core’ forms of finance increased significantly in
the first half of 2019, with 39% of SMEs using any type
of core product, up from 32% in 2018.55 The increase was
driven by types of finance often associated with short-
term use. Credit card and overdraft use rose to their
highest levels since 2012, at 23% and 19% respectively
in H1 2019 (figure B.9) (discussed further in section
2.4: Bank lending).
Demand for bank loans and commercial mortgages
and fixed assets or vehicles, typically associated
with longer-term growth, remained stable.56 Lenders
reported increased demand for unsecured lending,
particularly credit cards, over the first three quarters of
2019. In Q4 there were signs of demand for unsecured
lending contracting, consistent with the lower use of
finance reported by the SME Finance Monitor.57
The British Business Bank’s Business Finance Survey
did not record a similar pick up in use of credit cards
and overdrafts from 2018 to 2019, remaining stable at
25-26% and 36% respectively.58 However, the Bank’s
survey was in the field from the end of August to the
end of November whereas the pickup recorded in these
finance types by the SME Finance Monitor has occurred
over the first half of 2019 so timing effects may account
for these differences.
201320142015201620172018Q1 2019Q2 2019Q3 2019Q4 20192012Per centUse any external nance
Permanent non-borrowers
0
10
20
30
40
50
60
FIG B.8
SMEs USING EXTERNAL FINANCE AND PERMANENT
NON-BORROWERS
Source: BVA BDRC SME Finance Monitor, 3 months to December2019. 2011 data not
shown consistent with BVA BDRC reporting. Dotted line denotes start of quarterly data.
0
2
4
6
8
10
12
14
16
18
20
22
24
26
2013
2014
2015
2016
2017
2018 H1 2019
2012
Per centBank overdraft
Credit cards
Bank loan / commercial mortgage
Leasing / hire purchase
FIG B.9
SMES USING CORE FINANCE PRODUCTS AND LEASING/HIRE
PURCHASE OVER TIME
Source: BVA BDRC SME Finance Monitor, Q2 2019. 2011 data not shown consistent
with BVA BDRC reporting. Dotted line denotes end of annual data.
British Business Bank
2.2 Use of external finance
44
Alternative finance use has also increased to 19%
in H1 2019, from 12% in 2018, driven by leasing and
hire purchase, which overtook bank loans/commercial
mortgages as the third most used type of finance.
This was consistent with the Bank’s Business Finance
Survey (figure B.10), where leasing and hire purchase
was the third most commonly used finance product.
Working capital and cashflow have typically been the
most often cited reasons for seeking finance, but in
the first half of 2019, there were more mentions of
needing funding for working capital, to cover a short-
term funding gap or to help through trading difficulties.59
Of those identifying a need for funding (4% of SMEs),
40% said cashflow support was the reason for requiring
funding in H1 2019, up from 32% in 2018 (also see
figure A.23 in section 1.2: Impacts of macroeconomic
developments on SME finance markets). This was
followed by investing in new plant or machinery, cited
by 27%, up from 22% in 2018, possibly reflecting the
increased take up of leasing and hire purchase. Over
the same period, there were fewer mentions of funding
expansion in the UK, taking advantage of new business
opportunities and taking on staff.
Taken together, this indicates the increased demand for
finance is predominantly for short-term purposes rather
than funding long-term growth ambitions or expansion.
The Bank is exploring updating the Business Finance
Guide, which sets out different sources of finance available
to businesses, with more information relevant to smaller
businesses looking for finance for short-term purposes.
This would help businesses find finance to address their
working capital and cash flow needs and manage any
potential uncertainty associated with EU exit.
RELUCTANCE TO USE LONG-TERM FINANCE
CONTINUED AND APPLICATION RATES REMAINED
HISTORICALLY LOW, MEANING BUSINESSES
COULDBE FORGOING GROWTH
Demand for longer-term credit has remained weak
throughout 2019,60 consistent with suppressed
investment intentions as reported by a range of business
surveys.61 While more smaller businesses are using
finance than ever before, the majority remain averse to
using finance to grow and develop their business over the
long-term. Current use of finance was previously a key
predictor of positive attitudes towards, and future use of,
finance.62 However, the share of those using finance that
wouldn’t be happy to use it to grow their business rose
from 43% in 2015 to 62% in H1 2019 (figure B.11).
Credit cardsBank overdraftLeasing or hire purchase (asset nance)Bank loanLoans from directors, individuals or organisationsPrivate lending / nance companyCommercial mortgageTrust / Charity fundingInvoice nance or factoring (asset based)Government or local government grantsEquity from another individual or organisationFinance from Government schemePer cent0
5
10
15
20
25
30
35
40
FIG B.10
SHARE OF SMES CURRENTLY USING SELECTED EXTERNAL
FINANCE PRODUCTS
Source: British Business Bank 2019 Business Finance Survey – Ipsos MORI.
2015
2016
2017
2018
H1 2019
Per centUsing external nance and not happy to use to grow
0
10
20
30
40
50
60
70
FIG B.11
PROPORTION OF USERS OF FINANCE NOT HAPPY TO USE IT
TO GROW AND DEVELOP THEIR BUSINESS
Source: BVA BDRC SME Finance Monitor Q2 2019, dotted line denotes end of annual data.
2.2 Use of external finance
45
Small Business Finance Markets 2019/20
Reluctance to use finance for growth continued across
most smaller businesses. As highlighted in section 1.1: Five
years on, 28% agreed they would be happy to use finance
in Q4 2019, down from 42% in 2014.63 A steady three
quarters of businesses (73%) would be willing to accept a
slower growth rate rather than borrowing to grow faster
and just over half (52%) said they never thought about
using (more) finance in H1 2019.64
Significant variation in attitudes to finance exists across
the UK’s SME population, reflecting the diversity in smaller
businesses. The box on ‘Attitudes to finance by British
Business Bank segment’ explores this further.
The declining share of businesses seeking finance
over the past decade reflects the downward trend in
willingness to use finance. According to BEIS’ Longitudinal
Small Business Survey, just 12% of businesses with
employees had sought finance over the past 12 months
in 2018, the lowest recorded share so far65 and less
than half the share that sought finance in 2010. Factors
related to uncertainty and risk remained the most
important reason why businesses were not seeking
finance in 2018.66 The fear of rejection, the second most
important factor, has become more prevalent as has the
anticipated time and/or hassle involved in the process.67
More recently, uncertainty has continued to play a role
in preventing some businesses from seeking finance
towards the end of 2019, with uncertain economic
conditions becoming the most common reason for
wanting finance but not applying.68
Perceptions that it’s difficult to get finance have risen
amongst small businesses, from 38% in H1 2018 to 42%
in H1 2019. This view is particularly prevalent amongst
start-ups (businesses under 2 years old) (64%) who may
lack the collateral, credit history and/or trading history to
secure finance. The British Business Bank’s Start Up Loans
programme offers loans, alongside business support and
mentoring, to new and early stage businesses.
Despite nearly half (46%) of businesses using finance in
H1 2019, just 4% had applied for new or renewed finance
in the 12 months prior to interview. This is consistent
with 4% reporting the same in 2018 (with 36% using
finance).69 From Q1 2018 the SME Finance Monitor has
collected data on a wider range of finance applications
than loans and overdrafts only and applications to a
wider range of finance providers. Applications for new
loans declined from 2.9% in 2012 to 1.5% in 2017 and
overdrafts from 4.0% to 1.6% over the same period
(as referred to in section 1.1: Five years on).70 While not
directly comparable, the latest SME Finance Monitor data
ATTITUDES TO FINANCE BY BRITISH BUSINESS
BANK SEGMENT
Attitudes to finance vary significantly across UK
businesses. The British Business Bank has undertaken
SME segmentation analysis based on attitudes
to using finance to identify the highest potential
and most receptive businesses. The segmentation
approach is described in more detail in the 2018/19
Small Business Finance Markets report.
Quicksilvers, the fastest growing businesses with
the most ambitious growth plans, are the most
prepared to take risks to achieve success and
the most open to using finance to help their
business grow and develop (figure B.12). For Savvy
Entrepreneurs (most likely to have run a business
before or multiple businesses) and Fighters (trying to
overcome obstacles), around half are willing to use
finance and to take risks to become more successful.
Fittingly, Contented businesses, with the lowest
growth ambition, are the least open to using finance
to grow and develop and the most risk-averse.
Per centFighters
Savvy
Entrepreneurs
Quicksilvers
Contented
As a business we are happy to use external nance
to help the business grow and develop
As a business we are prepared to take risks to become
more successful
0
10
20
30
40
50
60
FIG B.12
WILLINGNESS TO TAKE RISKS AND TO USE FINANCE TO
GROW AND DEVELOP THE BUSINESS
Source: BVA BDRC SME Finance Monitor, 10 quarters to Q2 2019
British Business Bank
2.2 Use of external finance
46
suggests the application rate for new loans was 1.3%
in the 6 quarters to Q2 2019, with applications for new
overdrafts at 0.9% over the same period.71
Increased use of finance combined with low application
rates suggests that smaller businesses are likely to
be renewing or drawing down on existing facilities
(particularly overdrafts and credit cards) rather than
applying for new facilities. The value of overdraft
facilities to smaller businesses is discussed further in
section 2.4: Bank lending.
Consistent with rising perceptions of difficulty securing
finance, success rates for applications of all types of
finance have decreased slightly since 2017, with the
share of applicants not being offered a facility rising to
24% for all applications between Q3 2018 to Q4 2019
(from 16% from Q1 2017 to Q2 2018).72 Trends in volume
of approvals for debt products are discussed further in
section 2.4:Bank lending.
Increased use of finance would usually suggest an
increase in those considering applying for or renewing
their finance in future.73 Around half (40 to 50%) of
Start Up Loans recipients surveyed over 2016 to 2018
planned to apply for external finance in the next twelve
months.74 However in the first half of 2019, just 9% of
all SMEs were using finance and planned to apply for
more, whereas 37% were using finance but with no plans
to apply (figure B.13). This means that 80% of current
finance users did not plan to use finance again in future
(reflecting smaller businesses’ aversion to using finance
to grow and develop highlighted earlier in the section).
Just 12% of all smaller businesses had plans to apply or
renew their finance over the next 3 months in H1 2019, a
decline from 14% in 2012 and 2013. Of those planning to
apply or renew their finance, 33% wanted more finance
to help with cash flow, up from 26% in 2018. According to
our Business Finance Survey, 17% of SMEs were planning
to apply for finance in the next 3 months. Of those, 30%
were planning to apply for an overdraft in the next 3
months (reported between August and November 2019),
up from 22% in 2018.
From a supply perspective, lenders expected demand
for lending to pick up in the near term. In Q4 2019, the
Bank of England reported a positive balance in lender
expectations for demand for small business lending over
the next 3 months. This is driven by unsecured lending,
with negative expectations for secured lending over the
next 3 months.75
2015
2014
2013
2012
2016
2017
2018 H1 2019
Per centUsing external nance and plan to apply (for more)
Do not use nance but plan to apply (for more)
Using external nance, no plans to apply (for more)
Do not use nance, no plans to apply (for more)
0
10
20
30
40
50
60
70
80
90
100
FIG B.13
USE OF FINANCE AND APPETITE FOR APPLYING (FOR MORE)
Source: BVA BDRC SME Finance Monitor Q2 2019, dotted line denotes end of annual data.
2.2 Use of external finance
47
Small Business Finance Markets 2019/20
BARRIERS TO USING SOME TYPES OF FINANCE
PERSISTED, INCLUDING A LACK OF AWARENESS AND
RELUCTANCE TO GIVE UP CONTROL
The increasing diversity of finance products, providers
and platforms means that smaller businesses have a
range of options when considering how to finance their
growth. However, imperfect or inaccurate information
may limit the efficiency by which capital is allocated to
growing firms.
Almost all SMEs are aware of core debt products, but
awareness of alternative forms of finance has decreased
since 2018, including venture capital (down to 60% from
69% in 2018), business angels (down to 33% from 41%
in 2018) and mezzanine finance (down to 9% from 12%
in 2018).76 More smaller businesses are aware of leasing/
hire purchase than any alternative form of finance, but
awareness has fallen to 84% from 89% in 2018, despite
increased use over the same period. Awareness of equity
crowdfunding platforms (50%) and marketplace lending
(39%) has also decreased significantly in 2019 (falling
by 20 percentage points and 13 percentage points
respectively), although this may have been driven by
questionnaire changes for these three forms of finance.77
Regional disparities in awareness of equity finance are
also apparent. This is particularly true of venture capital
and business angels, where the rate of awareness of
both forms of finance was almost 10 percentage points
higher in London and the South East than in the rest of
the UK (66% compared to 57% for venture capital, 39%
and 30% for business angels respectively).78
Although not suitable for all firms, equity finance can
be an important source of funding for innovative and
ambitious firms. High-growth businesses are more likely
to be using equity finance.79 However, over half of smaller
businesses said they did not know anything about equity
finance (62%)80 and just 18% were aware of a specific
provider to go to if they did want to apply for equity.81
Despite the link between use of equity and growth, an
equity information gap amongst scale-ups and other
smaller businesses persists.
Fear of external ownership increasingly deterred
businesses from using equity: 71% of those applying
for or considering equity finance cited reluctance to
give up control as a barrier (up from 62% in 2018).
This reluctance was particularly prevalent outside
London and the South East, with 76% of businesses
agreeing this was a barrier, compared to 63% in London
and the South East (figure B.14).
A lack of suitable investorsin the rm's local areaDeciding on its suitabilityfor raising nanceDiculties in putting together thebusiness value propositionDiculties nding an investor whoshares the rm's aims and objectivesThe short-term focus of investorsReluctance to give up anycontrol of the business to investors0
10
20
30
40
50
60
70
80
FIG B.14
BARRIERS TO APPLYING FOR EQUITY FINANCE IN LONDON AND
THE SOUTH EAST AND THE REST OF THE UK
Source: British Business Bank 2019 Business Finance Survey – Ipsos MORI.
Base = all who have applied for or have considered raising equity  nance (n=772)
London and the South East
UK excluding London and the South East
Per centBritish Business Bank
2.2 Use of external finance
48
Regional disparities are also apparent in businesses’
perceptions of other barriers to equity. Firms outside of
London and the South East were more likely to highlight
difficulties in putting together the business value
proposition (50% compared to 40% in London and the
South East) and a lack of suitable investors in their local
area (46% compared to 30% in London and the South
East). The perceived difficulty in raising equity finance
outside of London and the South East could account for
regional differences in equity use.
The Bank’s programmes are designed to address different
elements of these regional imbalances. The Bank’s Finance
Hub, which enables smaller businesses to explore which
finance options would work best for their business, aims
to increase awareness of different types of finance and
help businesses get investor ready. The Bank’s UK Network
has been set up to help address regional imbalances
in access to finance and works with intermediaries to
improve connectivity within regional ecosystems and
across the UK. In direct response to Bank analysis and UK
Network insights into local disparities in access to finance,
the Bank is developing its regional activities, including a
regional events programme to help inform businesses of
their finance options and next steps and a regional partner
programme to increase engagement and coordination with
key regional stakeholders.
MANY SMALLER BUSINESSES STILL RELY ON THEIR OWN
EXPERIENCE WHEN CONSIDERING FINANCE OPTIONS
Smaller businesses are increasingly self-reliant when
considering what type of finance to apply for and who
to apply to. Over a third drew on their own knowledge,
their staff’s knowledge or previous experience (35% in
2019, up from 27% in 2018) when deciding what to apply
for. Just under a third (31%, up from 25% in 2018) said
their own sources of information were the main influence
on what to apply for and 30% said this influenced their
decision on which provider to approach (up from 24%
in 2018).82 This change has not been coupled with
increased confidence from smaller businesses in their
own ability to assess different finance options. Instead,
it could reflect a reluctance to spend time considering a
range of sources (consistent with the increased share of
smaller businesses citing time or hassle as a key reason
for not seeking finance).83
After their own knowledge or resources, SMEs were
more likely to cite their existing bank or finance
provider as an influence over their finance decision
than any other information source: 1 in 5 (21%) cited
their provider as an influence on what to apply for and
17% said their provider was the main influence. Fewer
businesses cited their bank as an influence on which
provider to approach, suggesting some may be exploring
other options outside of their existing bank.84
When businesses first identified a need for finance,
speaking to their main bank continued to be the most
popular next step (29%), followed by researching finance
types online (14%).85 However fewer businesses were
considering more than one finance provider (down
to 34% from 40% in 2018) suggesting propensity to
shop around could have declined. Smaller businesses
increasingly lack confidence when it comes to applying
for finance products from different providers, with a
minority now saying they were confident in doing so
(48%, down from 54% in 2018).
The most common reason for contacting just one
provider was having an established relationship with
that provider (45%), followed by price-related factors
(cost/rates offered/best deal etc) (20%). The share of
businesses that cited the hassle involved in contacting
more than one provider has halved (6% compared to 12%
in 2018), indicating that businesses may be cognitively
more willing to shop around, but this is not necessarily
being reflected in behaviour. Having an established
relationship continued to be the most common reason
overall for choosing a specific provider, with over a third
(36%) citing this as their main reason and a large gap
between that and the next most cited main reason
(13% cited cost or rates offered).86 This could indicate
an inefficient allocation of resources where businesses
are not choosing the type of finance or provider that
represents the most competitive deal.
The British Business Bank’s Finance Hub enables
businesses to explore the finance types most suited
to their current circumstances and future aspirations
through its Finance Finder tool. The Hub provides
independent information and insight into how to get
finance ready and signposts to relevant finance experts
and associations.
2.2 Use of external finance
49
Small Business Finance Markets 2019/20
OVER A THIRD (36%) OF SMEs USE TRADE CREDIT,
REDUCING THE NEED FOR EXTERNAL FINANCE BUT
HIGHLIGHTING VULNERABILITY TO LATE PAYMENTS
The definition of external finance used by the SME
Finance Monitor excludes trade credit. Trade credit is
an agreement between a buyer and seller, whereby the
buyer of the goods or service does not need to pay for
those goods or services immediately but can delay the
payment for an agreed period of time. This can help the
buyer to manage their cashflow.
Use of trade credit has increased slightly to 36% in
H1 2019, up from 34% in 2018, which could reduce the
demand for external finance of some. Just over a quarter
(26%) of all SMEs said trade credit reduced their need
for finance. However, trade credit and external finance
are increasingly being used as complements: over half
(57%) of smaller businesses using trade credit use both
(figure B.15).87
Small businesses offer trade credit to their customers,
as well as receiving it. The share of businesses who receive
trade credit (34%) is equal to those who offer it (34%).88
However, at least two in five SMEs reported an average
delay in payment of at least one month for invoices and
trade credit.89 This can lead to cash flow issues and time
spent chasing payments for SMEs. The impact of late
payments for businesses is discussed further in section
2.9: Invoice finance and asset-based lending.
Reflecting the scale of the challenge, the government
is consulting on strengthening the powers of the Small
Business Commissioner to hold late payers to account.
Responsibility for the Prompt Payment Code will also
move to the Small Business Commissioner, concentrating
levers to tackle late payment into the same office.90
FIG B.15
RECEIVING OF TRADE CREDIT AND EXTERNAL FINANCE,
% OF ALL SMEs
Source: SME Finance Monitor H1 2019, calculations by British Business Bank, n=c.9,000
No trade credit or external  nance 38%
Trade
credit only
16%
Trade credit
and external
 nance
21%
External
 nance only
25%
British Business Bank
2.2 Use of external finance
50
• Firm characteristics play a key role in finance
use in all locations
• Debt finance remains relatively evenly
spread across the UK
• Equity finance continues to be concentrated
in London
• We continue to expand our knowledge of
the regional distribution of other forms
of finance
This section analyses variations in SME finance markets
across the UK. It builds on section 1.3: Finance in
entrepreneurial ecosystems, by explaining the current
imbalances in finance that ecosystem characteristics may
affect over time. As with section 1.3, the analysis uses a
range of spatial scales, dependent on data availability.
FIRM CHARACTERISTICS PLAY A KEY ROLE IN FINANCE
USE IN ALL LOCATIONS
Entrepreneurial ecosystem characteristics can influence
flows of finance in multiple ways. Alongside the influence
of ecosystem characteristics, specific firms will make
choices reflecting their own characteristics, as explained
in section 2.2.
The latest Business Finance Survey highlights the
importance of both factors. For example, 38% of firms
without employees sought finance in the last three years
compared to 83% of medium-sized firms with 50 to 249
employees. This 45-percentage point difference makes
the importance of firm size in finance use very clear.
There are also differences across regions with between
40% and 57% of firms seeking finance in the last
three years across the nine English regions, Scotland,
Wales and Northern Ireland. This 17-percentage point
gap makes the influence of ecosystem characteristics
equally clear.
The relative importance of ecosystem and firm-level
characteristics will vary depending on the outcome
considered and the level of analysis. This is something
that the remainder of this section will refer to when
analysing the latest finance outcomes across the UK.
51
2.3 SME finance at a local level
2.3 SME FINANCE AT
A LOCAL LEVEL
Small Business Finance Markets 2019/20
DEBT FINANCE REMAINS RELATIVELY EVENLY SPREAD
ACROSS THE UK
Debt finance continues to be relatively closely aligned
with the business population. Data on loans and
overdraft facilities granted by UK Finance members
to SMEs demonstrate this relatively even spread has
continued to 2019 (figure B.16).
Although the distribution is relatively even, there are
variations. For example, the shares of finance facilities
approved for SMEs in Northern Ireland, Wales and
Scotland were comfortably above the shares of SMEs
in those parts of the UK in 2019. Conversely, the shares
of facilities granted by UK Finance members to SMEs in
London and the South East were lower than the shares
of SMEs in those regions.
These variations could be driven by a range of factors.
For example, SMEs in London and the South East are
likely to have access to a more diverse range of finance
options than SMEs elsewhere. This could mean they
are less reliant on UK Finance members so are under-
represented in this data source.
Attitudinal factors could also play a role. For example,
in Northern Ireland 83% of SMEs feel confident in their
ability to apply for external finance from their own bank
according to our 2019 Business Finance Survey. This is
the highest in the UK and may help explain the relatively
high use of debt finance in Northern Ireland.
Patterns of firms’ use of debt finance do not just
depend on their attitudes and the characteristics of
their ecosystem but on their characteristics too. Even
in thriving ecosystems, new firms lacking a track record,
those being run by an entrepreneur with a weaker or
shorter credit history or those lacking collateral may
struggle to secure finance in the open market. Where
there are market imperfections such as these, the Bank’s
programmes can play a role.
The Enterprise Finance Guarantee (EFG) is one such
example. EFG is specifically designed to help facilitate
finance for viable smaller businesses with sound
borrowing proposals, but insufficient security to meet
a lender’s normal requirements.91 Businesses that are
faced with this problem can be found all over the UK.
This is evidenced by the fact that EFG has been used by
firms in at least 80% of the Local Authority Districts of
the UK in every year of its existence. In some years over
95% of Local Authority Districts have had at least one
firm benefitting.
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern IrelandPer centSMEs (2019)
Loan and overdraft facilities approved (2019 Q1-Q3)
Value of loans and overdrafts (2019 Q1-Q3)
FIG B.16
BANK LENDING AND THE SME POPULATION IN 2019
Source: British Business Bank analysis of UK Finance, BEIS Business Population Estimates
0
5
10
15
20
25
British Business Bank
2.3 SME finance at a local level
52
Although EFG benefits firms all over the UK, there are
some variations in usage. Examples of this include
the West Midlands and Yorkshire and the Humber
where 17% and 16% of EFG deals in 2019 have taken
place, despite these regions only hosting 8% and 7%
of UK SMEs, respectively. EFG usage is also relatively
high in the North West, East Midlands and the North
East (figure B.17). Usage appears to be relatively low in
London and the South east which may again reflect
the diversity of finance options available to firms in
these locations.
The geographic pattern of EFG usage is clearly influenced
by a complex range of factors but there is some evidence
of a correlation with property prices. As figure B.18
shows, EFG usage is slightly higher in areas with lower
property prices. Small business owners do often use
their homes to secure finance for their business92 but in
reality this correlation may be driven by multiple factors
including, for example, other components of wealth and
attitudes to finance.
Debt is one of the more commonly used forms of
finance in the UK with around 25% of SMEs using bank
overdrafts and around 9% using bank loans according to
the latest Business Finance Survey. Equity finance is less
prevalent with around 1% of SMEs currently using this
form of finance. Equity, however, is particularly suited to
firms with potential to scale-up rapidly so its distribution
is important despite its relative rarity.
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern IrelandPer centSMEs (2019)
EFG Facilities (2019)
FIG B.17
EFG DEALS AND THE SME POPULATION IN 2019
Source: British Business Bank analysis of EFG data and BEIS Business Population Estimates
0
2
4
6
8
10
12
14
16
18
20
1
Lowest
Prices
5
Highest
Prices
2
3
4
EFG Deals per 10,000 SMEs (Average 2015-19)FIG B.18
EFG USAGE AND AVERAGE PROPERTY PRICES
Source: Business Bank analysis of EFG Data, BEIS Business Population Estimates and
Land Registry House Prices
0
1
2
3
4
5
6
7
8
9
10
2.3 SME finance at a local level
53
Small Business Finance Markets 2019/20
EQUITY FINANCE CONTINUES TO BE CONCENTRATED
IN LONDON
London accounts for the largest share of equity activity
of any part of the UK. In the year to Q3 2019, 47% of
deals and 66% of investment in UK SMEs took place in
London (figure B.19). This concentration in London is a
fairly long-standing trend although recent years have
seen the level of concentration decline a little.93
London’s shares of deals and investment are well above
its 19% share of SMEs and 20% share of high growth
businesses.94 The 47% share of deals in London in the first
three quarters of 2019 matches London’s deal share for
2018 exactly while London’s 66% share of investment is
higher than the 58% share for the whole of 2018. As with
patterns of debt activity, both firm-level and ecosystem
level factors will play a part in the distribution.
At the firm-level, awareness is likely to be part of the
explanation as firms in London have the highest levels of
awareness of venture capitalists of any part of the UK.
The latest Business Finance Survey shows that 66% of
London firms are aware of venture capitalists as a form of
finance, a level matched only in the South East.
At the ecosystem level, factors including the high density
of business support services such as advisory firms and
the huge stock of venture capital investors mentioned in
section 1.3 are important in explaining the distribution.
The sectoral mix of companies in London will also be
part of the driving force behind the high levels of equity
activity. Technology companies are a key focus for equity
investors and London’s sectoral mix skews towards some
technology sectors. For example, around 9% of London
SMEs are involved in computer programming, consultancy
and related activities, compared to only 5% of SMEs in
the rest of the UK.
More granular data on deals at the Local Authority
District level also show a pattern of concentration in
London. Seven of the top 10 Local Authority Districts for
deal volumes in the first three quarters of 2019 were in
London (figure B.20).
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern IrelandPer centSMEs (2019)
High Growth Businesses (2017)
Deals (2019 Q1 - Q3)
Investment (2019 Q1 - Q3)
FIG B.19
EQUITY DEALS, INVESTMENT AND HIGH GROWTH
BUSINESSES, 2019
Source: British Business Bank analysis of Beauhurst and ONS Business Demography
0
10
20
30
40
50
60
70
FIG B.20
TOP 10 LADS FOR EQUITY DEALS BETWEEN Q1 AND Q3 2019
Source: British Business Bank analysis of Beauhurst
Local Authority District
Deals
Westminster
93
City of London
84
Islington
83
Hackney
72
Camden
65
Southwark
46
City of Edinburgh
42
Tower Hamlets
38
Manchester
27
South Cambridgeshire
26
British Business Bank
2.3 SME finance at a local level
54
Despite being in parts of the UK that received lower
shares of investment in 2019 than their shares of SMEs,
Manchester and Edinburgh also make it into the top ten.
This highlights the fact that there are variations within
regions as well as across them. South Cambridgeshire95
completes the top ten which, taken together, account for
46% of deals in Q1 to Q3.
At the other end of the scale, around 45% of Local
Authorities had no deals in the first three quarters
of 2019 (figure B.21). This is largely in-keeping with
previous years and can be partly explained by the
volatility of equity activity when considered at low levels
of geography.
Many business angels make equity investments using
the Enterprise Investment (EIS)96 and Seed Enterprise
Investment Schemes (SEIS) so data on these schemes
shed some additional light on the distribution of angel
activity. As with the overall equity investment landscape,
London is the most prominent region for EIS and SEIS
activity with firms in the capital securing 47% of deals
and 53% of investment in 2017/18 (figure B.22)97.
In addition to having the largest shares of deals and
investment, London also hosts the largest share of
investors using the EIS and SEIS schemes. 31% of those
whose location is known reside in the capital. Outside
of London, most of the remaining English regions, along
with Wales and Northern Ireland, have larger shares
of EIS and SEIS investors than of EIS and SEIS deals.
The exceptions are Scotland and the North West, some
of which may be driven by the relative strength of
Manchester and Edinburgh as highlighted above.
As with the overall equity market, awareness is likely
to be a factor in London’s leading share of EIS and SEIS
activity. 41% of London SMEs are aware of business
angels as a form of finance. This is the highest in the
UK with firms in the South East close behind with
37% awareness. Section 2.2: Use of external finance,
highlights regional disparities in awareness of types
of equity finance.
10005101520253035404550556065707580859095DealsEquity Deal Volume Percentile (2019 Q1 - Q3)
FIG B.21
DISTRIBUTION OF EQUITY DEALS ACROSS LADs
Source: British Business Bank analysis of Beauhurst

0
10
20
30
40
50
60
70
80
90
100
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern IrelandPer centSMEs (2019)
EIS and SEIS Deals (2017-18)
EIS and SEIS Value (2017-18)
EIS and SEIS Investors (2017-18)
FIG B.22
SHARE OF EIS/SEIS DEALS, INVESTORS AND SMEs BY REGION
AND DEVOLVED NATION FOR THE 2017/18 TAX YEAR
Source: British Business Bank analysis of HMRC EIS and SEIS data,
and ONS Business Demography
0
10
20
30
40
50
60
2.3 SME finance at a local level
55
Small Business Finance Markets 2019/20
WE CONTINUE TO EXPAND OUR KNOWLEDGE OF
THE REGIONAL DISTRIBUTION OF OTHER FORMS
OF FINANCE
Regional and sub-regional data on forms of finance other
than bank lending and equity investment is relatively
limited. There are, however, some useful sources and
pieces of research available.
Monitoring data on the Bank’s own programmes is one
such example. While we would not automatically expect
our activity to mirror the wider market given our focus
on addressing market imperfections, the distribution
of British Business Bank asset finance, and invoice and
asset-based lending activity appears relatively in line
with the SME population. This is explored further in
section 2.8 and section 2.9.
Another source of insight on funding beyond equity and
mainstream bank debt is Funding Circle’s 2019 Impact
Report.98 This report shows a fairly close alignment
between loans made by Funding Circle, one of the UK’s
major marketplace lenders, and the SME population.
This is comparable to the pattern seen in the bank
lending data from UK Finance and highlights how new
online entrants can support finance availability across
the UK.
Similar insights can be found in research by the Cambridge
Centre for Alternative Finance.99 The research suggests
that peer-to-peer business lending is geographically
diverse, particularly on the side of the businesses
borrowing funds. Comparing the transaction data compiled
for the study with the business population suggests, akin
to the Funding Circle report, that the spread is relatively
even (figure B.23). Given increased investment from
institutional investors, the Bank now refers to this type
of finance as marketplace lending, discussed further in
section 2.10
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern IrelandPer centSMEs (2017)
SMEs Using Peer-to-Peer Business Lending (2017)
FIG B.23
PEER-TO-PEER BUSINESS LENDING
Source: British Business Bank analysis of data from the Cambridge Centre for
alternative Finance and BEIS Business Population data
Note: CCAF collated transactions data from 15 peer-to-peer platforms so the gures in
the chart do not reect the entire market and may be skewed by the providers included.
0
5
10
15
20
25
British Business Bank
2.3 SME finance at a local level
56
Survey data offer another source of insight on the
regional patterns of other forms of finance. For example,
data from the SME Finance Monitor suggest that the
proportion of firms using leasing, hire purchase or vehicle
finance is relatively similar in most parts of the UK at
around seven to 10% (figure B.24). The two exceptions
are Scotland and Northern Ireland where 12% and 17%
of SMEs have reported using leasing, hire purchase or
vehicle finance between Q1 2017 and Q2 2019. This
relatively even usage backs up the pattern seen in the
Bank’s asset finance programme data as analysed in
section 2.8.
For less commonly used forms of finance, such as
private debt, survey data is less able to identify regional
differences. This is because even large surveys such
as the SME Finance Monitor and our Business Finance
survey are only likely to survey a handful SMEs using such
uncommon finance forms across the national dataset,
preventing meaningful regional comparisons.
In order to improve our understanding of the imbalances
in access to finance for smaller businesses across the UK
the Bank intends to collect new primary data on private
debt finance. As part of this project, also mentioned in
section 2.7 on debt funds, we will work with lenders to
anonymously compile data on transactions across the
UK to better understand national and regional trends for
this form of finance. This new data will complement the
qualitative insights that our UK Network gather from their
interactions with regional stakeholders across the UK.
Alongside our efforts to better understand regional
finance markets, the Bank already has a range of
programmes to help reduce imbalances. These include
our regional funds which are bringing additional capital
to the Northern Powerhouse, Midlands Engine and
Cornwall and Isles of Scilly areas, and the Regional
Angels Programme, which aims to help reduce regional
imbalances in access to early stage equity finance for
smaller businesses across the UK. On the demand side,
the Bank’s Demand Development Unit is raising the
Bank’s profile amongst smaller businesses across the
UK so that they are encouraged and enabled by our
demand-related activity to seek the finance best suited
to their needs.
95% Condence Interval
Central Estimate
0
5
10
15
20
25
Per centFIG B.24
PROPORTION OF SMEs USING LEASING, HIRE PURCHASE AND
VEHICLE FINANCE
Source: British Business Bank analysis of the SME Finance Monitor Q1 2017 to Q2 2019
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire & the HumberNorth EastNorth WestWalesScotlandNorthern Ireland2.3 SME finance at a local level
57
Small Business Finance Markets 2019/20
• Gross bank lending weakened in 2019 but
repayments decreased by more
• The use of short-term finance picked up
further in the first half of 2019 but there
are signs demand and approvals have
subsequently eased
• Deposits held by SMEs have risen to a fresh
record high, largely driven by medium-sized
businesses
• Credit conditions for small businesses are
unchanged but have tightened for their
medium-sized counterparts
• The experience of UK SMEs broadly mirrors
those in other major economies
This section starts by covering trends in bank lending
to SMEs over the past year, particularly changes in
aggregate measures such as gross lending. It then
looks at developments in short-term finance products
including overdrafts and credit cards. This is followed
by an examination of recent changes in the availability
and affordability of credit. Next, the section covers
developments in the deposits and credit balances held
by SMEs. It concludes by comparing the experience of
UK SMEs in obtaining finance to those in other major
economies. The section draws on the latest data from
sources including the Bank of England, UK Finance,
BVA BDRC’s SME Finance Monitor and the OECD.
British Business Bank
58
2.4 Bank lending
2.4 BANK LENDING
GROSS BANK LENDING WEAKENED IN 2019 BUT
REPAYMENTS DECREASED BY MORE
In nominal terms the value of new bank lending in 2019
was lower than in the same period of 2018. The gross
flow of new loans to SMEs (excluding overdrafts) was
£56.7bn in 2019, according to Bank of England (BoE) data
(figure B.25).100 This compares to £57.7bn in 2018, a fall
of 1.7%.
The weaker gross lending is consistent with the softness
of business investment last year. During 2019 the British
Business Bank’s market contacts reported subdued
demand for medium and long-term borrowing among
SMEs to invest for growth amid the economic uncertainty.
The weaker gross lending also coincides with the recent
strong growth of asset finance to smaller businesses
(see section B2.8: Asset finance). It is possible that some
SMEs have switched from using bank lending to asset
finance. This could be because they are unable to access
bank loans.
Similarly, the repayment of loans by SMEs in 2019 was
£54.7bn, down by 4.3% from £57.2bn in the previous
year. This follows repayments reaching a record high in
2018. A possible explanation for the lower repayments is
that some SMEs paid down debt earlier (ie during 2018)
to strengthen their balance sheets ahead of the original
March 2019 Brexit date.
Another reason for the lower repayments could be that
some SMEs have become more concerned about future
cash flow and want to preserve their cash balances. The
SME Finance Monitor for the three months to December
2019 showed that 24% of smaller businesses held large
credit balances, ie of more than £10,000. This is up
slightly from 23% in 2018 but much higher than in 2012
(16%), 2013 (17%) and 2014 (20%).101 It’s also possible
the lower repayments reflect that some SMEs seek to
preserve access to their loan facilities.
These two trends led net lending to be positive in
2019 (£2.0bn) (figure B.26). This was greater than the
positive net lending of £0.5bn in 2018. Net lending was
also positive in 2017 (£0.7bn), 2016 (£3.3bn) and 2015
(£2.2bn). Previously, net lending had several years of
negative outturns following the financial crisis.
The alternative UK Finance measures of bank lending
show broadly similar trends (figure B.27). However, the
volumes are lower than for the BoE measures. This is
because the UK Finance data is based on SME term loans
and overdrafts provided by the seven largest banks in
the UK, while the BoE measures represent the whole UK
banking sector.
£ Billion2013
2014
2015
2016
2017
2018 2019
2012
Gross lending
Repayments
0
10
20
30
40
50
60
FIG B.25
GROSS LENDING TO, AND REPAYMENTS BY, SMEs
Source: Bank of England, Bankstats
2011
2013
2015
2017
2019
£ Billion£ MillionNet lending (RHS)
Gross lending (LHS)
Repayments (LHS)
FIG B.26
BOE QUARTERLY GROSS AND NET FLOWS OF BANK LOANS
TO SMEs
Source: Bank of England, Bankstats
-2000
-1500
-1000
-500
0
500
1000
1500
2000
0
4
8
12
16
2012 2013 2014 2015 2016 2017 2018 2019
£ Billion£ MillionFIG B.27
UK FINANCE QUARTERLY GROSS AND NET FLOWS OF BANK
LOANS TO SMEs
Source: UK Finance
0
2
4
6
8
-1500
-1000
-500
0
500
1000
1500
Net lending (RHS)
New lending (LHS)
Repayments (LHS)
2.4 Bank lending
59
Small Business Finance Markets 2019/20
The value of new lending to SMEs in the first three
quarters of 2019 was £18.5bn. This was down by 2%
from £18.8bn in the same period in 2018. Similarly, the
repayment of loans by SMEs was £19.1bn in 2019-to-
date, 5% lower than the £20bn in the equivalent period
a year earlier.
Unlike the BoE measure, net lending was slightly negative
in the first three quarters of 2019 (-£0.6bn). However,
this is up from the negative net lending of £1.3bn in the
corresponding period of 2018. Net lending was negative
in 2018 (-£1.2bn) after being positive from 2015 to 2017.
UK Finance splits the SME data into small businesses and
medium-sized businesses. This shows that new lending
to small businesses in the first three quarters of 2019
was £4.4bn, down 14% from £5.1bn in the same period of
2018 (figure B.28). In contrast, new lending to medium-
sized businesses rose in 2019-to-date to £14.1bn. This is
up 3% from £13.6bn in the corresponding period of the
previous year. Taken together, these indicate that the
recent weakness of new lending to SMEs has been solely
driven by small businesses.
The rise in new lending to medium-sized businesses is
consistent with the British Business Bank 2019 Business
Finance Survey. This showed that the share of medium-
sized businesses currently using bank loans in 2019
(31%) was higher than in 2018 (23%).
The UK Finance split also shows that the value of
repayments by small businesses in the first three
quarters of 2019 combined was £5.5bn (figure B.29).
This is down 10% from £6.1bn in the equivalent period of
the previous year. Likewise, the value of repayments by
medium-sized businesses in 2019-to-date was £13.6bn,
2% lower than in the same period of 2018. Overall, these
similarly indicate that small businesses have recently
been the main driver of SMEs’ lower repayments.
£ BillionSmall businesses
Medium-sized businesses
FIG B.28
UK FINANCE NEW LENDING, SMALL AND MEDIUM-SIZED
BUSINESSES
Source: UK Finance
0
1
2
3
4
5
6
2011
2013
2015
2017
2019
£ BillionSmall businesses
Medium-sized businesses
FIG B.29
UK FINANCE REPAYMENTS, SMALL AND MEDIUM-SIZED
BUSINESSES
Source: UK Finance
0
1
2
3
4
5
2011
2013
2015
2017
2019
British Business Bank
2.4 Bank lending
60
THE USE OF SHORT-TERM FINANCE PICKED UP
FURTHER IN THE FIRST HALF OF 2019 BUT THERE
ARE SIGNS DEMAND AND APPROVALS HAVE
SUBSEQUENTLY EASED
The use of bank overdrafts and credit cards rose in the
first half of 2019, according to the SME Finance Monitor
for Q2 2019 (the latest available for this particular data)
(see figure B.9 in section B2.2 Use of external finance).
The share of smaller businesses using bank overdrafts
increased from 19% in 2018 to 23% in the first six
months of 2019. This was the highest since the series
began in 2012 and represents an acceleration of a trend
that started in 2017. Similarly, the share using credit
cards climbed to 19% in H1 2019, also a record high,
from 14% in 2018.
The SME Finance Monitor data is consistent with the BoE
Credit Conditions survey for Q2 2019, in which lenders
reported a net increase in the demand for credit card
lending by small businesses for the second consecutive
quarter.102 The British Business Bank’s market contacts
have reported a conscious strategic move by new and
existing credit card providers toward serving businesses
including SMEs. The providers now offer credit cards for
business-to-business supplier payments with favourable
terms, eg 45 days interest free credit. It’s possible that
this contributed to the pickup in the use of, and demand
for, credit cards in the first half of 2019.
The SME Finance Monitor data is also in line with our
market contacts noting a spike in overdraft usage in the
period leading up to the original March 2019 Brexit date
to cover the costs associated with mitigating potential
disruption such as stock-building.
However, subsequent data on the demand for – and
approvals of – overdrafts and credit cards suggest the
use of short-term finance has eased. First, the BoE Credit
Conditions Survey for Q4 2019 showed that lenders
reported the demand for total unsecured lending from
small businesses had fallen slightly (figure B.30).103
This was the first quarterly decline in two years. The
breakdown indicated that while the demand for credit
card lending was unchanged, there was a net decline in
other unsecured lending (which includes overdrafts).
This is consistent with our market contacts not seeing a
similar spike in overdraft usage in lead up to the October
Brexit date.
-30
-20
-10
0
10
20
30
2018
2017
2019
Net percentage balanceCredit cards
Other unsecured lending
FIG B.30
DEMAND FOR CREDIT CARDS AND OTHER UNSECURED LENDING,
SMALL BUSINESSES
Source: Bank of England, Credit Conditions Survey
2.4 Bank lending
61
Small Business Finance Markets 2019/20
Second, separate UK Finance data showed the value of
overdraft facilities approved or increased each month
declined in Q3 2019 for the second consecutive quarter
(see figure A.22 in section 1.2: Impact of macroeconomic
developments on SME finance markets). However, it
remained higher than in 2016 and 2017. Previously, the
value of overdraft facilities approved/increased surged
from late 2017 through 2018 to a seven-year high. A
probable explanation for the lower values in Q2 and Q3
2019 is that many SMEs had already acted to get overdraft
facilities in place, consistent with lower new overdraft
application rates over 2018 and 2019 reported by the SME
Finance Monitor (see section 2.2: Use of external finance).
Despite the rise in the use of credit cards and overdrafts
in 2018 and the first half of 2019 reported by the SME
Finance Monitor, data from UK Finance shows the value of
SMEs’ overdrawn balances remains much lower than when
the series started in 2011 (figure B.31). In September 2019
the combined value of the overdrawn balances of small
and medium-sized businesses was £9.2bn. This is down
around 30% from £13.1bn in July 2011.
DEPOSITS HELD BY SMEs HAVE RISEN TO A FRESH
RECORD HIGH, LARGELY DRIVEN BY MEDIUM-SIZED
BUSINESSES
The value of deposits held by smaller businesses
remained on an upward trend in 2019. The latest UK
Finance data (September 2019) showed it rose to
£202bn. This was a record high and up 76% from when
the series started in July 2011.
By size, the main driver of the increase in the value of
SMEs’ deposits in the first nine months of 2019 was
medium-sized businesses. This contrasts with the rises
in 2017 and 2018, which were respectively solely and
largely driven by small businesses. The recent pickup in
the value of deposits held by medium-sized businesses
led it to rise above that of their small counterparts in April
2019 and remain so thus far (figure B.31).
The SME Finance Monitor for Q2 2019 reported that most
(96%) smaller businesses held some credit balances in
the first half of 2019.104 In the three months to December
2019 the share of SMEs holding credit balances of
£10,000 or more was 24%.105 As highlighted earlier in
this section, this was one of the highest shares since the
data series began in 2012. It was also much higher than in
2012 (16%). There is evidence of a link between holding
large credit balances and demand for external finance. In
Q2 2019 most (81%) of SMEs that held such sums said
that it reduced their need for external finance, which is the
equivalent of 10% of all SMEs.106
0
20
40
60
80
100
120
2011
2013
2015
2017
2019
£ Billion£ BillionMedium business deposits (LHS)
Small business deposits (LHS)
Medium business overdrawn balances (RHS)
Small business overdrawn balances (RHS)
FIG B.31
OVERDRAWN BALANCES AND VALUE OF DEPOSITS,
SMALL AND MEDIUM-SIZED BUSINESSES
Source: UK Finance
Note: The large increase in the deposits and overdrawn balances of medium-sized
businesses in Q4 2018 was due to a change in the reporting by one of the high street
banks that provides data to UK Finance
0
3
6
9
12
15
18
British Business Bank
2.4 Bank lending
62
CREDIT CONDITIONS FOR SMALL BUSINESSES ARE
UNCHANGED BUT HAVE TIGHTENED FOR THEIR
MEDIUM-SIZED COUNTERPARTS
The BoE Agents’ summary of business conditions
(based on consultations with companies including SMEs)
noted credit conditions tightening in some sectors
throughout 2019. The summary for Q4 2019 indicated
businesses in more sectors than previously had
experienced tighter credit conditions to some extent.107
It reported the appetite of banks to lend to sectors more
vulnerable to an economic downturn (specifically retail,
casual dining, construction and property) remained low.
The summary also noted that banks tightened lending
criteria modestly for other sectors (but did not specify
which). This is consistent with our market contacts
recently noting some banks tightening credit conditions.
However, the BoE Credit Conditions survey for Q4 2019
(based on consultations with lenders) reported a net
decrease (-11.3%) in the availability of credit to medium-
sized businesses only.108 The net decrease was the third
in a row and the largest since the data series began
in 2009. In contrast, the availability of credit to small
businesses was little changed. For the fifth consecutive
quarter, the net percentage balance of respondents that
reported a decrease in credit availability was broadly in
line with those reporting an increase (figure B.32).
Separate BoE data indicates that credit remains
affordable by historical standards. Interest rates on a
range of SME loans have fallen modestly over the past
year (figure B.33).109 The effective interest rate on all
SME loans has declined slightly from 3.35% in December
2018 to 3.29% in the same month of 2019.110 The
effective floating rate, which broadly tracks the BoE
Bank Rate, remains slightly lower than that for all loans
while the effective fixed rate is still somewhat higher.
The BoE’s Monetary Policy Committee Bank Rate was at
0.75% throughout 2019. This followed the Bank Rate
rising by 25 basis points to 0.5% in November 2017 and
by another 25 basis points in August 2018.
The Survey on the Access to Finance of Enterprises
(SAFE) provides an insight into the interest rate charged
for credit lines and overdrafts to SMEs in European Union
countries. The latest wave of the survey (conducted
from September to October 2019) showed the mean
and median interest rates charged to UK SMEs for credit
lines and overdrafts in 2019 were 5.6% and 3.5%
respectively.111 These were marginally lower than in
2018 (5.7% and 3.7%). However, the mean and median
interest rates for the UK remained higher than the EU
average of 3.2% and 2.5% respectively.
Q3
2018
Q4
2018
Q1
2019
Q2
2019
Q3
2019
Q4
2019
Q2
2018
Net percentage balanceSmall businesses
-15
-10
-5
0
5
10
15
FIG B.32
NET CHANGE IN CREDIT AVAILABILITY, SMALL AND
MEDIUM-SIZED BUSINESSES
Source: Bank of England, Credit Conditions Survey
Medium-sized businesses
2017
2018
2019
2016
Per centAll loans
FIG B.33
EFFECTIVE INTEREST RATES (NEW BUSINESS) FOR SMEs
Source: Bank of England, Bankstats
Floating rate
Fixed rate
0
1
2
3
4
5
2.4 Bank lending
63
Small Business Finance Markets 2019/20
THE EXPERIENCE OF UK SMEs BROADLY MIRRORS
THOSE IN OTHER MAJOR ECONOMIES
The story for smaller businesses in the UK obtaining
finance resembles their international counterparts.
When comparing the UK with the EU, the best source
of evidence is the SAFE. It also reports on SMEs that
currently see access to finance as the most important
problem they face. The share in the UK that viewed
access to finance as the top issue was 6% (figure B.34).
This was slightly higher than Germany (5%) but a little
lower than the average across the EU (7%). The UK’s
share was also below France and the Netherlands
(both 8%). Germany, France and the Netherlands are
among the UK’s top trading partners.
The SAFE also provides insight into which groups of
financial products are relevant to SMEs. It defines
relevant as the enterprise having used the products in
the past or were considering doing so in the future.
The UK is in line with the EU average for leasing or hire-
purchase (figure B.35). Similarly, the UK is close to the
EU average for credit lines (which includes bank or credit
card overdrafts) and equity capital. In contrast, UK SMEs
appear less reliant on bank loans, and more on trade
credit, than the EU average.
Among those SMEs that said bank loans were not
relevant to their enterprise, the survey asked them the
most important reason why this was the case. The top
reason in all EU countries was they did not need bank
loans. The share of UK SMEs citing this reason was
84% (figure B.36). This was higher than in Germany
and the Netherlands (both 81%), France (77%) and the
EU average (76%). Other reasons included insufficient
collateral, the interest rate or price was too high, reduced
control over the enterprise, too much paperwork, and no
bank loans were available. In the UK each of these other
reasons were cited by only a small share of SMEs, ie 3%
or less.
Per centBank
loans
Credit
lines
Leasing or
hire-purchase
Trade
credit
Equity
capital
France
Germany
Netherlands
UK
EU
FIG B.35
SMEs REPORTING FINANCE PRODUCTS AS RELEVANT TO
THE BUSINESS
Source: European Commission and European Central Bank, European Survey on
access to nance to enterprises (SAFE), 2019
0
10
20
30
40
50
60
70
Germany
UK
EU
France
Netherlands
Per cent72
74
76
78
80
82
84
86
FIG B.36
SMEs REPORTING BANK LOANS AS NOT RELEVANT BECAUSE
THEY DON'T NEED THAT TYPE OF FINANCE
Source: European Commission and European Central Bank, European Survey on
access to nance to enterprises (SAFE), 2019
Germany
UK
EU average
France
Netherlands
Per cent0
1
2
3
4
5
6
7
8
9
FIG B.34
SMEs REPORTING ACCESS TO FINANCE AS THE MOST
IMPORTANT PROBLEM FACING THE BUSINESS
Source: European Commission and European Central Bank, European Survey on
access to nance to enterprises (SAFE), 2019
British Business Bank
2.4 Bank lending
64
Access to finance is still high on the policy agenda around
the world. The governments of most OECD member
countries including the UK provide guarantees to support
lending in smaller business finance markets. The size of
the SME loan guarantees relative to GDP varies widely
among OECD countries. The latest available data at the
time of publication is for 2017.112 Among the countries
for which data was available, the largest scheme was in
Turkey, where the outstanding volume of the guarantees
as a share of GDP was more than 7% (figure B.37). This
compares to around 4% in Japan and South Korea.
In many OECD countries, SME loan guarantees represent
less than 1% of GDP. The UK’s SME lending guarantees
as a share of GDP are modest compared to most OECD
countries (figure B.38).
There remains a good rationale for the British Business
Bank loan guarantee products that are designed to make
lending markets work better for smaller businesses. The
long running Enterprise Finance Guarantee (EFG) scheme
facilitates lending to smaller businesses that are viable
but unable to obtain finance due to having insufficient
security to meet the lender’s normal requirements.
EFG has supported the provision of c.36,000 business
facilities to a value of over £3.3bn.
Turkey
Japan
South Korea
Thailand
Hungary
Colombia
Slovenia
Chile
Italy
Greece
Percentage of GDP
FIG B.37
GOVERNMENT LOAN GUARANTEES FOR SMEs IN 2017,
PERCENTAGE OF GDP, LARGEST 10
Source: OECD, Financing SMEs and Entrepreneurs, 2019
0
1
2
3
4
5
6
7
8
Percentage of GDP
FIG B.38
GOVERNMENT LOAN GUARANTEES FOR SMES IN 2017,
PERCENTAGE OF GDP, CONTINUED
Source: OECD, Financing SMEs and Entrepreneurs, 2019
Note: Data for Canada and Peru refers to 2016 and for Israel to 2015 instead of 2017.
The UK data point is 0.002
0
0.1
0.2
0.3
0.4
0.5
0.6
United Kingdom
South Africa
Mexico
Israel
Denmark
Switzerland
Slovakia
Australia
Peru
Canada
Czech Republic
Netherlands
Belgium
Kazakhstan
Russia
United States
Finland
Spain
France
Estonia
Poland
2.4 Bank lending
65
Small Business Finance Markets 2019/20
• The number of challenger and specialist
banks has increased since 2013, most
serve SMEs
• Challenger and specialist banks are
improving the diversity of smaller business
finance markets
• Challenger and specialist banks are adding
capacity to the industry
• The range of products and services available
to SMEs has been increased by challenger
and specialist banks
• Larger UK banks are increasing their
technology spend and creating new brands
• Challenges remain for the challenger and
specialist banks
• Innovation and competition from challenger
and specialist banks has improved the
diversity of sme banking, the British
Business Bank is committed to further
supporting the sector
The term “challenger and specialist banks” covers all
retail (as opposed to wholesale) financial institutions in
the UK excluding the five largest.113 This section focuses
on challenger and specialist banks that provide products
and services to businesses including SMEs. It draws on
data from sources including PwC UK, UK Finance, the
Bank of England (BoE), the Financial Conduct Authority
(FCA) and the latest annual reports of challenger and
specialist banks.
The section begins by outlining the different types of
challenger and specialist banks. It then covers recent
trends in the banking licences granted to challenger and
specialist banks. Next, the section looks at a sample of
challenger and specialist banks and provides an indication
of the extent to which each lends to businesses. This is
followed by a discussion of how challenger and specialist
banks have added capacity to the industry. It then turns
to the impact they have had on the behaviour of the
largest banks. The section concludes with a look at the
challenges faced by challenger and specialist banks.
British Business Bank
66
2.5 Challenger and specialist banks
2.5 CHALLENGER AND
SPECIALIST BANKS
Within the UK’s challenger and specialist banks, there
are different sub-groups. PwC UK have set out how they
differentiate between them. Looking first at challenger
banks, the relevant types identified by PwC UK are full-
service and digital-only.114
Full-service banks are mid-sized and offer a broad range
of relatively conventional products such as current
accounts and loans to both personal and business
customers including SMEs. They are committed to a
physical presence as part of a model that is blended with
a digital offering. The main examples are Virgin Money
UK, Metro Bank, TSB Bank and the Co-operative Bank.115
Digital-only banks are mainly start-ups with a small
but growing scale. Such banks typically have little or no
physical presence and work solely through mobile phone
applications. They serve personal or business customers,
or both. Examples include Starling Bank and Atom Bank.
Turning to specialist banks, they are described by
PwC UK as smaller than full-service banks and focused
on offering a range of lending and saving products to
customers that they believe are underserved in the
market such as certain types of SMEs. Specialist banks
tend to put more emphasis on call centres than a physical
presence such as branches. They also have some regional
offices and digital channels, and often use intermediaries
such as brokers to acquire new business. Examples
include Aldermore Bank, Shawbrook Bank, Secure Trust
Bank, OneSavings Bank, Charter Court Financial Services,
Close Brothers Group, Paragon Bank, Wyelands Bank and
Wesleyan Bank.116
The British Business Bank considers a type of bank that
has been identified by UK Finance – micro banks - to
be a sub-group of specialist banks. UK Finance defines
micro banks as deposit-taking institutions with assets
of less than £5bn. Micro banks typically focus on offering
products and services to businesses including SMEs.117
Examples include OakNorth Bank, Cambridge & Counties
Bank and United Trust Bank.
Challenger and specialist banks have been a great
source of diversity within SME finance markets in recent
years. The number of challenger and specialist banks in
the UK has grown following the global financial crisis,
developments in financial technology, and a regulatory
change in 2013 that made it easier for firms to get a
UK banking licence. Some of the new challenger and
specialist banks have brought fresh business models to
the sector.
The British Business Bank views diversity within SME
finance markets from the point of view of a smaller
business. Improving who can access finance, where it
can be accessed, when and on what terms the access is
arranged, and how it is delivered requires not only new
providers but also new products and business models.118
Consequently, the range of products and business models
more than the sheer number of new banks has greatly
enriched diversity in SME finance markets.
2.5 Challenger and specialist banks
67
Small Business Finance Markets 2019/20
THE NUMBER OF CHALLENGER AND SPECIALIST BANKS
HAS INCREASED SINCE 2013, MOST SERVE SMEs
Between 2013 and 2019 more than 40 financial
institutions were granted a full or restricted banking
licence in the UK by the Prudential Regulation Authority
(PRA) (figure B.39).119 This followed the PRA and FCA
introducing reforms in 2013 that lowered the barriers to
entry.120 In the three years to 2019 alone, over 20 new
banking licences were issued. This was a little higher than
in the three years to 2016.
Of those firms issued with a banking licence in the seven
years to 2019, around half went to new overseas banks.
Among the remainder, most were granted to new UK
banks while a handful went to those that arose due to
ring-fencing.121
Of the banking licences granted since 2013, around half
have gone to those that provide retail products and
services to businesses including SMEs. The other half
went to wholesale banks and banks that offer retail
products and services to personal, corporate and private/
institutional customers (figure B.40).
Among the challenger and specialist banks that were
issued a banking licence over this period, there was
a mix of full-service, digital-only and specialist banks
including micro banks. In recent years new digital-only
and specialist banks including micro banks have been
more common. Publicly available information indicates
that there are a handful of applications for bank licences
pending. These include B-North and Recognise,122, 123
while DF Capital plans to apply.124
It is also possible to operate in the UK without a PRA
banking licence. Under the European Economic Area
“Passport” system, a firm licenced in one of the European
Union member states to provide financial products and
services can also offer these to other countries within
the region without needing further authorisation.
Examples include Revolut.125 The FCA has indicated that,
following the UK leaving the EU on 31 January 2020,
passporting will continue until the transition period ends
on 31 December 2020.126
2013
2014
2015
2016
2017
2018
2019
Number of new bank licences0
2
4
6
8
10
12
FIG B.39
NEW UK BANKS AUTHORISED BY THE PRUDENTIAL
REGULATION AUTHORITY, 2013-2019
Sources: Bank of England, Financial Conduct Authority, British Business Bank calculations
2013
2014
2015
2016
2017
2018
2019
Number of new bank licencesBusiness/SME
Personal/business/SME
Personal
Corporate
Private/Investors
0
1
2
3
4
5
6
7
8
9
10
FIG B.40
CUSTOMERS SERVED BY NEW UK RETAIL BANKS AUTHORISED
BY THE PRA
Sources: Bank of England, Financial Conduct Authority, British Business Bank calculations
British Business Bank
2.5 Challenger and specialist banks
68
An insight into the focus of challenger and specialist
banks on commercial lending can be gained from their
latest annual reports. The British Business Bank has
looked at the commercial lending and loan books of
nearly 20 challenger and specialist banks. Although the
precise definitions of commercial lending vary among the
banks in this sample, we have used the information to
provide an indicative position. Consequently, the numbers
are not directly comparable between the banks.
The annual reports indicate that commercial lending by
full-service banks as a share of their loan book tends to
be lower than that of micro banks. It is also generally a
little lower than for most specialist banks. This is the case
for full-service banks including Metro Bank, Clydesdale
Bank and the Co-operative Bank (figure B.41).127
However, the loan books of full-service banks are typically
larger than those of micro banks (eg Unity Trust Bank,
Cambridge & Counties Bank and United Trust Bank) and
specialist banks (eg Aldermore Bank, Secure Trust Bank
and OneSavings Bank). Consequently, in value terms,
commercial lending by full-service banks is greater than
that by micro banks and their specialist counterparts.
The sole digital-only bank in our sample is Starling Bank.
Commercial lending as a share of its loan book is lower
than that of all full-service, specialist and micro banks.
Similarly, Starling Bank’s loan book is relatively small.
There is currently no publicly available data on the total
value of lending to SMEs by UK challenger and specialist
banks. The closest we have identified is research by
BDO, which found that the total lending to personal and
business customers by 19 UK challenger banks in the 12
months to September 2019 was £115bn.128 This was up
3% from the same period a year earlier and a record high
(the earliest data available is for the corresponding period
to September 2010). It was also more than double that of
five years’ earlier.
A split of the data by personal and business customers
is not available. However, BDO have indicated the data
is very heavily weighted toward residential mortgages
while the remainder – business lending – is largely
comprised of commercial mortgages.
FIG B.41
COMMERCIAL LENDING AND LOAN BOOKS OF CHALLENGER AND SPECIALIST BANKS, LATEST ANNUAL REPORTS
Sources: Challenger and specialist banks' annual reports, British Business Investments
Note: Data is indicative only; data for Charter Court is from professional buy-to-let loans; OneSavings Bank acquired Charter Court in 2019;
Clydesdale Bank is part of Virgin Money UK
Size of loan bookFocus on commercial lending
The Co-operative
Clydesdale
Metro
Aldermore
Secure Trust
Redwood
PCF
United Trust
Unity Trust
Charter Court
AIB (GB) UK
Investec
Handelsbanken
Cambridge
& Counties
Paragon
Starling
OneSavings
Masthaven
2.5 Challenger and specialist banks
69
Small Business Finance Markets 2019/20
CHALLENGER AND SPECIALIST BANKS ARE
IMPROVING THE DIVERSITY OF SMALLER BUSINESS
FINANCE MARKETS
When trying to gauge the impact of challenger and
specialist banks on smaller business finance markets,
typically the starting point would be to look at their
market share - but this is difficult to answer. One of
the major reasons is there is no single market in which
challenger and specialist banks compete, be it the
customers they target, the regions they operate in or the
products and services they offer.
Even if one pinpointed which market share to look at,
the data currently isn’t publicly available. Consequently,
it is necessary to look at other indicators to see how
challenger and specialist banks are improving the
diversity of smaller business finance markets.
The remainder of this section looks at some of these
indicators such as the capacity the challenger and
specialist banks are adding to the industry, the products
and services they offer, and their impact on the behaviour
of the largest UK banks.
CHALLENGER AND SPECIALIST BANKS ARE ADDING
CAPACITY TO THE INDUSTRY
In financial year 2018 the total assets of the five largest
banking groups in the UK ranged from around £300bn
(Santander UK) to more than £2 trillion (HSBC Bank).
However, it is worth noting that HSBC Bank is a global
bank with assets beyond the UK market.
The total assets of challenger and specialist banks,
which typically focus on the UK market, are much
smaller. Among the challenger and specialist banks for
which 2018 financial year data is available, the largest
total assets were held by full-service banks. Virgin
Money UK ranked top (£43.5bn) and is the sixth largest
UK bank by assets. The next largest was TSB Banking
Group (£41.1bn), followed by the Co-operative Bank
(£23.1bn) (figure B.42)
Digital-only banks had some of the smallest total assets.
Starling Bank was lowest (£0.2bn). The disparity in the
total assets of full-service banks and digital-only banks
partly reflects that many digital-only banks are start-ups.
It is also a function of the different business models that
the two types of challenger and specialist banks utilise.
Virgin Money UK
TSB Banking Group
Co-operative Bank
Metro Bank
Paragon Banking Group
OneSavings Bank
Aldermore Group
Close Brothers Group
Shawbrook Group
Charter Court FS
Provident Financial
Secure Trust Bank
OakNorth Bank
PCF Group
Starling Bank
£ Billion
FIG B.42
TOTAL ASSETS OF CHALLENGER AND SPECIALIST BANKS,
2018 FINANCIAL YEAR
Source: Bloomberg
Notes: Aldermore Group & Charter Court are for the 2017 nancial year;
Virgin Money UK is comprised of CYBG and Virgin Money, OneSavings Bank
acquired Charter Court in 2019

0
5
10
15
20 25 30 35 40 45
British Business Bank
2.5 Challenger and specialist banks
70
Between financial years 2016 and 2018, total assets of
most of the five largest UK banking groups fell.
The largest decline was experienced by the Royal Bank
of Scotland Group (-13%), followed by Barclays (-7%),
Santander UK (-6%) and Lloyds Banking Group (-2%).
HSBC Bank was the only one that saw a rise in total
assets (8%). However, some of the UK’s largest banks
increased their lending to SMEs, eg Lloyds Banking Group
and Barclays.
In contrast, total assets of most challenger and specialist
banks grew over the same period (figure B.43). Yet total
assets of the long-established Co-operative Bank fell.
THE RANGE OF PRODUCTS AND SERVICES AVAILABLE
TO SMEs HAS BEEN INCREASED BY CHALLENGER AND
SPECIALIST BANKS
During and shortly after the financial crisis, many banks
changed their focus and the extent of their activity in
different markets. This process has slowed and, in some
cases, reversed.
While Santander UK recently withdrew from the asset
finance industry, it continues to be active in SME
markets.129 Many challenger and specialist banks have
thrived in underserved markets such as asset finance.
Asset finance is still well served by many of the largest
banks (see B 2.8: Asset finance) but the range of assets
they are prepared to lend against is often much less
varied compared with some of the challenger and
specialist banks.
Many of the challenger and specialist banks do not offer
the full range of products and services that the largest
UK banks provide, especially when they concentrate
on exploiting perceived market gaps. However, to help
their customers who need a wider range of products and
services, some have partnered with financial technology
companies (FinTechs) or other challenger and specialist
banks that do offer some of these products and services.
For example, several digital-only banks provide in-
app “marketplaces” that offer products such as saving
accounts, insurance or mortgage broking from third
party providers. The largest UK banks had initially been
apprehensive about such partnerships but are starting
to explore them. For example, some of the largest banks
that do not directly offer invoice finance to the smallest
businesses refer such customers to relevant partners.130
Metro Bank
TSB Banking Group
OneSavings Bank
Virgin Money UK
Shawbrook Group
Aldermore Group
Charter Court FS
Close Brothers Group
OakNorth Bank
Paragon Banking Group
Secure Trust Bank
Starling Bank
PCF Group
Provident Financial
Co-operative Bank
£ Billion
FIG B.43
CHANGE IN TOTAL ASSETS OF CHALLENGER AND SPECIALIST
BANKS, FINANCIAL YEARS 2016 TO 2018
Source: Bloomberg
Notes: Aldermore Group and Charter Court are for the 2016 to 2017 nancial years;
OneSavings Bank acquired Charter Court in 2019

-6
-4
-2
0
2
4
6
8
10
12
2.5 Challenger and specialist banks
71
Small Business Finance Markets 2019/20
LARGER UK BANKS ARE INCREASING THEIR
TECHNOLOGY SPEND AND CREATING NEW BRANDS
Perhaps one of the most telling impacts that the newer
challenger and specialist banks have had is they have
changed the behaviour of the more established banks.
Since these newer banks began to appear there was often
talk of how to address both the ever-increasing customer
expectations and the threat posed by the challenger
and specialist banks themselves. Most of the largest UK
banks have subsequently created in-house or out-sourced
digital-only banks or are launching mobile applications to
rival those of the challenger and specialist banks.
Lloyds Bank has committed to spend £3bn on its digital
transformation. Similarly, the Royal Bank of Scotland
Group (which includes NatWest) has created Esme ,
a digital-only bank which offers unsecured loans of up to
£250,000 to businesses including SMEs. Barclays Bank
has taken the slightly different approach of a partnership
with MarketFinance, which gives Barclays both a new
digital offering and an invoice finance product they
did not offer SMEs previously. Such investment by the
larger banks will increase the pressure on challenger
and specialist banks to continue to innovate in order to
stay ahead. If they don’t, those that solely rely on having
better technology to give them a competitive edge could
find themselves losing ground.
One area in which challenger and specialist banks
have sought to differentiate themselves is customer
relationships. A recent survey of SME customers of the
14 largest business current account providers in Great
Britain showed that some challenger and specialist
banks scored highly in the rankings. For overall service
quality, Handelsbanken UK and Metro Bank ranked first
and second respectively.131 Also, as Yorkshire Bank ranked
fifth, three challenger and specialist banks were in the
top five.
CHALLENGES REMAIN FOR THE CHALLENGER AND
SPECIALIST BANKS
As with any new industry or market entrants, some
challenger and specialist banks have experienced
growing pains. The industry in total faces a few
significant challenges as it matures.
Firstly, while share prices of challenger and specialist
banks have mostly outperformed those of the largest
banks, there are some notable exceptions. In January 2020
the share price of Metro Bank was around 90% lower than
in the same month of the previous year. This followed an
accounting error becoming public knowledge in early 2019.
Some of the newer, digital-only banks, such as Revolut,
have also come under scrutiny for their compliance
processes. As the industry and challenger and specialist
banks mature, it will be important they put in place
suitable systems and processes. This will require investing
time and money.
Secondly, challenger and specialist banks continue to
raise the issue of their cost of funding. This includes the
impact of a perceived lack of level playing field between
banks using the internal ratings-based approach to
model credit risk capital requirements (which is almost
exclusively the largest five banks) and those that
calculate it using the standardised approach. This is
particularly important for those challenger and specialist
banks that are competing against the larger banks for
market share, and others that are stopped from writing
more business by capital constraints.
Finally, particularly for the newer challenger and
specialist banks, the expectation of them achieving scale
and making a profit is being mentioned more and more.
OakNorth Bank is notable in that it achieved “double
unicorn” status, ie was valued at more than $2bn, in 2018
and was also profitable. In the initial years of the life of
a business, many expect to, and do, make a loss as they
look to establish themselves and build a customer base.
Despite this, they can still attract very large investment
and similarly vast valuations. For example, Revolut
also achieved “unicorn” status in 2018 but remains
loss making.132 As these firms mature, investors will be
increasingly looking for them to become profitable.
INNOVATION AND COMPETITION FROM CHALLENGER
AND SPECIALIST BANKS HAS IMPROVED THE DIVERSITY
OF SME BANKING, THE BRITISH BUSINESS BANK IS
COMMITTED TO FURTHER SUPPORTING THE SECTOR
The increase in number of licences issued by the
PRA has brought more banks and business models
into the SME banking sector, which previously had
changed very little in decades. The British Business
Bank supports challenger and specialist banks through
various programmes including the ENABLE Guarantee
and Enterprise Finance Guarantee (EFG) and via our
commercial arm British Business Investments.
British Business Bank
2.5 Challenger and specialist banks
72
Equity finance for smaller businesses can come from a
variety of different types of equity investor including
business angels, venture capitalists, crowdfunding
platforms, private investors and Government backed
funds.133 This section explores recent trends in UK equity
finance up to Q3 2019 using data from Beauhurst.
International comparisons of venture capital (VC) are also
made using PitchBook data. This section also explores
lower mid-market (LMM) private equity deals and recent
trends in VC fundraising and financial performance.
Equity finance is an important source of funding for
businesses with the potential for rapid growth. Equity
finance can be used by early stage businesses that are
unable to secure debt finance due to their risk profile,
lack of collateral or unstable cash flows. Established
businesses looking to expand into new markets or
develop new products may also utilise equity finance.
These businesses may not be able to obtain debt finance
due to their existing leverage or risk profile.
Outside equity investors not only contribute financial
capital but can also bring additional benefits and added
value through their experience, scale-up expertise and
access to networks.
Equity finance is not suitable for every business and
only a small proportion of smaller businesses overall are
currently using or have sought equity finance in the last
three years (1%).134 High growth firms are more likely
to use equity finance than non-high growth firms, but
debt finance remains the most frequently used source
of funding for both high growth and non-high growth
firms.135
• UK equity investment is set to reach record
levels in 2019 due to increased numbers of
growth stage deals and larger deal sizes
• The UK remains Europe’s largest venture
capital market
• UK venture capital fundraising is at its
highest ever level with a higher number of
funds closing in 2019
• Long-run venture capital financial returns
continue to improve but exit activity slowed
in 2019
• The British Business Bank is increasing the
availability of equity finance to UK SMEs
British Business Bank
73
Small Busines Finance Markets 2019/20
2.6 Equity finance
2.6 EQUITY FINANCE
UK EQUITY INVESTMENT IS SET TO REACH RECORD
LEVELS IN 2019 DUE TO INCREASED NUMBERS OF
GROWTH STAGE DEALS AND LARGER DEAL SIZES
Beauhurst data shows investment values were very
strong over the first three quarters of 2019 and are set
to reach record levels. £5.5bn of equity was invested into
UK SMEs over Q1-3 2019, a 13% increase relative to the
same period last year (figure B.44). This marks the third
year in a row in which annual SME equity investment
values have grown.
Beauhurst classifies equity deals into four distinct
stages; seed, venture, growth and established, which
reflect the recipient company’s underlying position
in terms of product development, commercialisation,
sales and profitability. Investment value trends vary
considerably between these stages. The British
Business Bank has combined the Beauhurst growth and
established stages together for simplicity, which we
refer to as the ‘growth’ stage.
Figure B.45 shows equity investment value by business
stage over time. The increase in overall investment value
in 2019 was primarily driven by increases at the growth
stage. £3.3bn of equity investment was made in growth
stage SMEs over the first three quarters of 2019, a 33%
increase compared to the same quarters in 2018. This
was due to an increase in both the number and average
size of growth stage deals.
Seed stage investment also increased in Q1-3 2019
compared to Q1-3 2018, by 14%, whilst investment into
venture stage businesses was down 16% year-on-year.
Although the increase in investment value in 2019
was largely concentrated in growth stage SMEs, it was
not purely due to a small number of very large deals in
excess of £100m. There were six equity deals larger than
£100m in Q1-3 2019, with a combined value of £891m,
representing 16% of overall investment value. Although
this is a higher proportion than 2018 when deals larger
than £100m formed 14% of the market, it is much lower
than 2017 (24%). Despite this, the overall proportion of
investment coming from deals larger than £10m is at its
highest level (69%).
0
100
200
300
400
500
2013 2014 2015 2016 2017 2018 2019
2012
2011
£ Billion0
0.5
1.0
1.5
2.0
2.5
Number of deals (LHS)
Investment value (RHS)
FIG B.44
NUMBER OF EQUITY DEALS AND VALUE OF INVESTMENT,
PER QUARTER
Source: British Business Bank analysis of Beauhurst
0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2013 2014 2015 2016 2017 2018 2019
2012
2011
£ BillionSeed
Venture
Growth
FIG B.45
VALUE OF EQUITY DEALS BY STAGE, PER QUARTER
Source: British Business Bank analysis of Beauhurst
British Business Bank
2.6 Equity finance
74
This suggests there was capital available for UK scale-ups
more broadly in 2019, not just for high profile ‘unicorn’
companies looking to raise equity rounds greater than
£100m. Figure B.46 breaks down investment value by
deal size category and shows that a record £1.2bn was
invested in deal sizes between £25m and £50m, making
this deal size category the largest contributor to total
equity investment in Q1-3 2019.
Large increases in total UK SME equity investment
were partly driven by increasing deal sizes. Figure B.47
shows that the overall mean average size of equity deals
increased 9% to £4.8m in Q1-3 2019, a historically high
level. Increasing overall average deal sizes in 2019 were
driven by an 11% increase in the average deal size of
growth deals, up from £14.7m to £16.4m. This is higher
than the previous peak of £15.5m in 2017 despite fewer
‘mega-deals’ being completed, signalling an increase in
growth stage deal sizes more widely. Average seed stage
deal size also slightly increased from £1.3m to £1.4m,
whilst there was an 11% decrease in the average size of
venture stage deals.
Mean average deal sizes can be distorted by a few
very large deals and so figure B.48 shows trends in the
median deal size. The overall median equity deal size
also increased in Q1-3 2019 compared to 2018, by 5%
to £1.1m. This was driven by increases in the median
size of seed and growth stage deals, increasing 4% and
9% respectively. Median deal sizes have been trending
upwards across all stages since 2016, however the
median size of venture stage deals reduced in Q1-3 2019
for the first time since 2013.
Per cent2013 2014 2015 2016 2017 2018 2019
2011 2012
Up to £5m
£5m up to £10m
£10m up to £25m
£25m up to £50m
£50m up to £100m
£100m+
0
10
20
30
40
50
60
70
80
90
100
FIG B.46
EQUITY INVESTMENT VALUE BY DEAL SIZE, PER YEAR
Source: British Business Bank analysis of Beauhurst
0
2
4
6
8
10
12
14
16
18
£ Million2013 2014 2015 2016 2017 2018 2019
2011 2012
Seed
Venture
Growth
Overall
FIG B.47
MEAN AVERAGE EQUITY DEAL SIZE BY STAGE, PER YEAR
Source: British Business Bank analysis of Beauhurst
0
1
2
3
4
5
6
7
8
£ Million2013 2014 2015 2016 2017 2018 2019
2011 2012
Seed
Venture
Growth
Overall
FIG B.48
MEDIAN AVERAGE EQUITY DEAL SIZE BY STAGE, PER YEAR
Source: British Business Bank analysis of Beauhurst
2.6 Equity finance
75
Small Business Finance Markets 2019/20
Figure B.44 shows that 1,241 equity deals were
completed in UK SMEs over the first three quarters of
2019, a 3% increase relative to the same period last year.
This was primarily due to an 18% increase in the number
of growth stage deals, although seed stage deal numbers
also slightly increased. Between Q1 and Q3 2019 there
were 527 deals completed in seed stage UK SMEs,
4% more than Q1-3 2018 (figure B.49). Although this
increase is a positive step for early-stage start-ups, seed
stage deal numbers are still much lower than their peak
in 2017. The number of venture stage deals declined
slightly in Q1-3 2019 with 476 deals completed, 3%
fewer than Q1-3 2018.
Private equity/venture capital (PE/VC) funds remained
the most active type of equity investor in UK SMEs
between Q1 and Q3 2019 with involvement in 561 deals
(figure B.50). This is a 20% increase compared to the
same period last year, driven by large increases in both
seed and growth stage deals. Crowdfunding platforms
had another strong year with involvement in 298 deals in
Q1-3 2019, a 7% increase over Q1-3 2018.
Between 2014 and 2018 there was a noticeable change
in the deal size demography of UK SME equity deals.
Figure B.51 shows the proportion of deals below £0.5m
saw a large decline between 2014 and 2018, with a
greater proportion of deals falling into the larger deal size
categories. This downward trend looks to have stopped
in Q1-3 2019, with the proportion of overall deals smaller
than £0.5m stabilising at 30%.
The number of completed deals above £10m increased
by 15% in Q1-3 2019 compared to Q1-3 2018, growing
as a proportion of overall deals. Deals between £500k
and £5m in size declined as a proportion of overall deal
numbers. In 2018 the large increases in the number of
deals at the larger end came alongside a big decline in the
smallest deals, potentially signalling a shift in investor
risk appetite. It is therefore a positive sign in 2019 that
increases in the number of larger deals did not come at
the expense of earlier stage funding.
0
50
100
150
200
250
2013
2014 2015
2016
2017
2018 2019
2011
2012
Seed
Venture
Growth
FIG B.49
NUMBER OF EQUITY DEALS BY STAGE, PER QUARTER
Source: British Business Bank analysis of Beauhurst
0
50
100
150
200
250
2013
2014
2015
2016
2017
2018 2019
2011
2012
PE/VC
Crowdfunding
FIG B.50
NUMBER OF EQUITY DEALS BY INVESTOR TYPE, PER QUARTER
Source: British Business Bank analysis of Beauhurst
Per cent0
10
20
30
40
50
60
70
80
90
100
2013 2014 2015 2016 2017 2018 2019
2011 2012
Up to £0.5m
£0.5m up to £1m
£1m up to £2m
£2m up to £5m
Undisclosed
£5m up to £10m
£10m+
FIG B.51
EQUITY DEALS BY DEAL SIZE, PER YEAR
Source: British Business Bank analysis of Beauhurst
British Business Bank
2.6 Equity finance
76
THE UK REMAINS EUROPE’S LARGEST VENTURE
CAPITAL MARKET
PitchBook data shows £8.5bn of VC was invested into
the UK in 2019, up from £6.7bn in 2018. The UK remains
Europe’s largest equity market, with 37% of European
equity deals and 38% of equity investment going to
UK-based companies in 2019.136
Yearly equity investment figures can be volatile and
so the subsequent analysis examines the size of UK,
European and US VC markets using three-year average
figures covering 2016 to 2018.137 There has also been
strong growth in VC activity in Asia over the last few
years, especially in China. Some reports suggest the
Chinese VC market could be as large as the US, although
there are concerns over the accuracy of the Chinese data.
This report currently does not include China in the cross-
country comparison.
The average amount of VC invested per year in the
UK between 2016 and 2018 was £5.6bn, compared to
£2.2bn in Germany and £2bn in France (figure B.52).
Whilst differences in PitchBook’s coverage of VC deals
across countries could explain some of these differences,
other data sources like Dealroom also show the UK
market to be larger than Germany and France combined
in 2019.138 The proportion of VC funding going to seed
stage deals is relatively similar across countries at around
5% of all VC funding, although the percentage is slightly
higher in the UK (7%).
The UK has a higher average number of VC deals per year
(1,390) than France and Germany, who averaged 561 and
450 deals respectively, over 2016 to 2018 (figure B.53).
There are differences in the proportion of deals going to
the seed stage with Ireland having the highest proportion
of seed stage deals (35%), reflecting the early stage
development of its VC market. On average 27% of UK
equity deals were at the seed stage between 2016 and
2018, the same proportion as Germany but higher than
Sweden (18%) and France (16%).
When making cross country comparisons of VC markets,
it is useful to take the size of the economy into account.
The following analysis expands on the analysis
undertaken in the Bank’s 2019 Equity Tracker report by
examining VC investment as a proportion of GDP and the
number of VC deals per trillion of GDP across different
European countries. The US and Canada are also included
in the charts to provide context.
Germany
France
Sweden
Ireland
UK
£ Billion0
1
2
3
4
5
6
Seed
Early stage VC
Later stage VC
FIG B.52
AVERAGE ANNUAL VC INVESTMENT BY STAGE, 2016 TO 2018
Source: British Business Bank analysis of PitchBook (data accessed 08/11/2019)
Germany
Sweden
Ireland
UK
France
Seed
Early stage VC
Later stage VC
0
200
400
600
800
1,000
1,200
1,400
1,600
FIG B.53
NUMBER OF VC DEALS BY STAGE PER YEAR, 2016-2018 AVERAGE
Source: British Business Bank analysis of PitchBook (data accessed 08/11/2019)
2.6 Equity finance
77
Small Business Finance Markets 2019/20
United
Kingdom
Sweden Ireland Canada
France Germany
United
States
Per cent0
0.1
0.2
0.3
0.4
0.5
FIG B.54
VC INVESTMENT AS A PERCENTAGE OF GDP, 2016 TO 2018
Source: British Business Bank analysis of PitchBook and World Bank data
(data accessed 08/11/2019)
Over the 2016-2018 period, the US VC market was 1.7
times larger than the UK VC market after accounting for
differences in GDP (figure B.54). The UK VC market was
around three times larger than France and Germany after
accounting for differences in economy size. Sweden and
Ireland also have reasonably high levels of VC relative to
their GDP.
The UK has a higher number of VC deals relative to GDP
compared to the US (514 and 389 deals per trillion of
GDP respectively) (figure B.55). Ireland and Sweden
also have a higher number of deals than the US after
taking into account GDP. In comparison, the deal figures
for France and Germany are much lower at 215 and 121
deals respectively.
An alternative approach is to compare the number of VC
deals per capita. This shows the UK has 21 VC deals per
million population over the 2016 to 2018 time period,
slightly below the US at 23 deals per million population.
The UK is ahead of France and Germany who have 8 and
5 deals per million population respectively, but Ireland
and Sweden perform well on this measure with 35 and 25
deals per million population respectively.
The UK’s VC market is highly developed and mature
compared to most other European countries. This is
also illustrated by the UK contributing 42% of Europe’s
current unicorn businesses.139 The UK has 18 unicorns
compared to 9 in Germany and 3 in France. The UK
remains an important part of the European VC market
going forward.
Ireland
Sweden United
States
Canada
France Germany
United
Kingdom
0
100
200
300
400
500
600
FIG B.55
NUMBER OF VC DEALS PER £TRN OF GDP, 2016-2018
Source: British Business Bank analysis of PitchBook and World Bank data
(data accessed 08/11/2019)
British Business Bank
2.6 Equity finance
78
OVERVIEW OF LOWER MIDDLE MARKET PRIVATE
EQUITY (PE)
The middle market sector comprises of companies
sized between larger SMEs and companies that
have access to wider capital markets. Mid-market
companies play an important role in the UK, creating
half a million jobs and generating one third of all
private sector revenue.140 The lower middle market
(LMM) refers to the subset of companies at the smaller
end of this segment in terms of revenue. LMM PE deals
refer to equity investments into these firms.
Investment characteristics
There are two main types of transaction falling under
LMM deals – management buyouts (MBO) and growth
capital. These deals often involve both primary capital
issued, which is used for growth, as well as transferring
ownership of existing shares from one owner to
another. The key difference between MBO and growth
capital deals is the size of the equity stake taken by the
PE investor. MBOs involve large and majority stakes,
whilst growth deals tend to be typically characterised
by minority percentage shares. Despite this difference
between deal types, all companies receiving LMM PE
share similar characteristics. Target firms typically
earn between £5m and £50m revenue per annum and
are established businesses, having been in operation
for at least eight years. They tend to be profitable,
generating steady growth, albeit lower growth than
the companies funded by VC.
Figure B.56 illustrates how LMM deals fits into the
overall finance landscape compared to VC and wider
PE with respect to company age, deal size and level
of risk taken. LMM deals are focused on established
firms with robust revenue streams and tend to cover
companies operating in a broader range of sectors
FIG B.56
LMM CHARACTERISTICS VS PE/VC, STYLISED EXAMPLE
Source: British Business Bank analysis
Higher
Lower
Smaller
Company age
0+ years
2+ years
5+ years
Larger
Investment
risk
Later stage VC
Early stage VC
including Seed
Lower mid-market
Private equity
Deal size
than VC, which focuses on technology sectors. LMM
deals differ from mainstream PE in that deal sizes are
smaller - generally no larger than £20m. This is also
reflected in funds which are also smaller – typically no
bigger than £200m.
BENEFITS OF PE FUNDING TO COMPANY
PERFORMANCE
LMM PE aims to create value through operational
improvements rather than relying on leverage. Fund
managers work with the company’s management
team devoting significant resources to help define
and execute a business growth strategy. In doing so,
LMM deals deliver benefits to the wider economy
by enhancing productivity and creating sustainable
growth. This is illustrated below with three examples
of companies that have grown as a direct result of
receiving LMM private equity:
• Dorset Cereals, a small manufacturer of Muesli, was
purchased through a management buy-in facilitated
by Langholm Capital in 2005. Langholm helped
rebrand the product and funded the building of a
new packaging plant. Sales increased from around
£4m in 2005 to around £30m in 2007 with head
count doubling to more than 100.141
• President Engineering Group is a manufacturer
and distributer of specialist engineering products.
Yorkshire Fund Managers provided £6m for the
management buyout of Cornflow and Bestobell
Valves business from the parent company. Since
2010 turnover has doubled from £10m to £20m,
with a greater focus on exports which now form
90% of business sales.142 YFM have helped with
access to sector, knowledgeable non-executive
board members and facilitated strategic acquisitions.
• Entanet is a UK wholesale communications
infrastructure provider, delivering a range of
connectivity and telecommunication products
and services to small businesses. Mobeus Equity
Partners (MEP) backed the management team in an
MBO 2014, committing £9.5m and introducing an
experienced Chairman. Since the original investment,
Entanet refined their business model and introduced
new products and services. As a result, annual
revenues grew from £27m to £36m in 2017.143
Over the past year British Patient Capital has invested
in several LMM funds through a small pilot initiative as
part of the VC Catalyst programme. The Bank will look
to review the performance of these funds in
due course.
2.6 Equity finance
79
Small Business Finance Markets 2019/20
UK VENTURE CAPITAL FUNDRAISING IS AT ITS HIGHEST
EVER LEVEL WITH A HIGHER NUMBER OF FUNDS
CLOSING IN 2019
The 2018/19 Small Business Finance Markets report
identified that the number of UK-based VC funds reaching
final close had been trending downwards since 2015.144
PitchBook data shows this trend has now reversed, with
the annual number of UK-based VC funds reaching final
close increasing in two consecutive years (2018 and 2019).
In total 26 UK-based VC funds reached final close in 2019
raising £3.0bn, the highest amount raised by UK VC funds
in a single year (figure B.57).
Large VC funds (funds larger than £250m) raised the
most capital, accounting for 58% of total VC fundraising
in 2019. Global VC fundraising conditions have been
strong in recent years, likely relating to the current low
interest rate environment. Low interest rates increase the
amount of capital available to invest in alternative asset
markets as LPs increase their allocation to alternative
strategies, including VC, seeking higher returns.145
Despite LPs focussing their capital in larger funds, 2019
was also a strong year for fund managers at the smaller
end of the spectrum. There was a resurgence in the
number of VC funds closing at under £50m, with seven
funds in this size category reaching final close in 2019
compared to two in 2018 and three in 2017. This has led
to a decline in the average size of UK VC funds reaching
final close, with mean fund size falling 1.4% to £131m in
2019. Median fund size also dropped, for the first time
since 2014, by 15.8% to £80m.
Improving conditions in 2019 for managers raising
smaller funds is reflected in the increased number of
first-time fund manager teams entering the market.
Eight first-time fund managers raised VC funds in 2019,
representing 31% of the funds reaching final close in the
year. This trend was seen across European VC markets,
with analysis by Atomico showing first-time fund
managers closed more funds at much larger sizes than
previously. The median size of funds raised by first-time
managers increased threefold between 2014 and H1
2019, demonstrating the increased confidence LPs have
in the latest generation of European fund managers.146
0
5
10
15
20
25
30
35
40
2013 2014 2015 2016 2017 2018 2019
2012
2011
£ Billion0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Number of funds (LHS)
Total fundraising (RHS)
FIG B.57
NUMBER AND VALUE OF UK VC FUNDS REACHING FINAL CLOSE,
PER YEAR
Source: British Business Bank analysis of PitchBook (data accessed 14/01/2020)
British Business Bank
2.6 Equity finance
80
LONG-RUN VENTURE CAPITAL FINANCIAL RETURNS
CONTINUE TO IMPROVE BUT EXIT ACTIVITY SLOWED
IN 2019
Long-run financial returns from investing in VC
continued to show improvement in 2019. The latest
BVCA Performance Measurement Survey reports that
the 10-year horizon Internal Rate of Return (IRR) for VC
funds established since 1996 is 8.4% as of December
2018 (figure B.58). This is a 1.8 percentage point increase
compared to the December 2017 position, likely reflecting
strong exit activity in 2018 resulting in substantial capital
distributions to LPs. Despite VC returns improving they
still slightly lag public market returns, with the 10-year
horizon IRR from the FTSE all-share index increasing by
1.8 percentage points to 9.1%. Investors generally expect
a premium from investing in VC as it is a riskier and less
liquid asset than a public market investment.
Limiting the VC fund sample to funds with a 2002
vintage onwards is more informative as it removes the
cash flows of funds closed prior to the dot-com bubble
bursting in 2001. These returns are therefore more
representative of the returns an LP could expect from
investing in UK VC. The IRR for this fund cohort is 10.3%,
1.2 percentage points higher than the equivalent FTSE
all-share index return.
Venture returns still lag the returns achieved by
management buy-out (MBO) funds. As of December
2018, the 10-year horizon IRR’s for small, medium and
large MBO funds are 13.7%, 10.8% and 15.1%. Buyout
deals are generally lower risk than VC deals due to the
investments having a shorter holding period and the
recipient companies being more established and less
likely to fail. Most limited partners therefore require a
return premium to incentivise investment in a VC fund
over a buyout fund.
It should be noted that most private equity MBO deals
involve an element of leverage, so that fund managers
partially fund the buyout of a company using debt. Global
interest rates have remained at historically low levels in
the decade since the global financial crisis, increasing
the financial returns possible from buyout transactions
utilising leverage.
FIG B.58
COMPARISON OF 10-YEAR HORIZON IRR’s AND SELECTED
MARKET COMPARATORS, BY YEAR
Source: BVCA Performance Measurement Survey 2017 and 2018
IRR (% P.A)
As at
31/12/2017
As at
31/12/2018
Private equity overall
(including VC)
11.0
13.8
Venture capital
6.6
8.4
Venture capital
(pre-2002 vintage funds)
1.3
1.1
Venture capital
(2002 vintage funds onwards)
8.8
10.3
Small MBO
15.3
13.7
Medium MBO
10.3
10.8
Large MBO
11.4
15.1
Selected comparators
FTSE all-share index
6.3
9.1
2.6 Equity finance
81
Small Business Finance Markets 2019/20
In the ‘Future of Defined Contributions Pensions’ report
published in October 2019 the Bank committed to
take specific action to increase transparency around
VC returns for prospective LP investors.147 We took
the first steps towards this through our ‘Analysis of
UK VC financial returns’ report which demonstrated
that the pooled return of UK VC funds with a vintage
year between 2002 and 2013 was higher than for the
equivalent set of US funds.148
New data from Cambridge Associates also supports
this, showing that as of Q2 2019 the 1-year and 3-year
horizon IRR’s for European VC funds are above US VC
funds.149 Global institutional investors are beginning
to consider the opportunities available in European VC.
Analysis from Atomico shows that in 2018 pension funds
committed $1bn into European VC funds, which is much
higher than the $395m they committed in 2017.150
Exit markets are an important component of the VC
ecosystem as they ultimately generate financial returns
and provide liquidity to LPs, freeing up capital for re-
investment in other VC funds.151 The 2019 Equity Tracker
report identified that the value of VC-backed exits in
the UK in 2018 was at record levels, whilst exit numbers
had been trending downwards. This suggests larger exit
valuations, which are likely contributing to improvements
in reported UK VC IRRs in 2018.
Figure B.59 shows that this picture changed in 2019. The
total number of VC-backed exits increased by 24% to 114
whilst exit value decreased by 76% to £1.1bn, meaning
average exit size has reduced. 2018 can be considered
an outlier year with several very large, high profile exits
occurring including Farfetch and Funding Circle. Exit sizes
in 2019 were more in line with historic levels.
0
30
60
90
120
150
2013 2014 2015 2016 2017 2018 2019
2012
2011
£ Billion0
1
2
3
4
5
Number of exits (LHS)
Exit value (RHS)
FIG B.59
NUMBER AND VALUE OF UK VC-BACKED COMPANY EXITS, PER YEAR
Source: British Business Bank analysis of PitchBook (data accessed 02/01/2020)
British Business Bank
2.6 Equity finance
82
UK VC-backed IPO (Initial Public Offering) activity has
been particularly subdued in 2019, with only one
relatively small IPO taking place. In contrast US IPO
activity was very strong, with VC-backed ‘unicorns’ such
as Uber and Lyft driving record exit values through their
IPOs.152 European IPO activity was also strong with more
tech IPOs in Europe than in the US over the first six
months of 2019, although the sizes of these European
IPOs have been substantially smaller.153
Beauhurst research points towards a couple of factors
contributing to the UK IPO market slowing in 2019. Firstly,
large amounts of economic uncertainty combined with
the current availability of later stage VC capital could
mean some UK VC-backed companies are delaying their
IPOs. In addition, the recent poor post-IPO performance
of many global previously VC-backed companies has led
to public investors paying closer attention to companies
underlying financial metrics.154 This may have also
‘prompted strategic leaders of high-growth companies to
err on the side of caution when it comes to braving the
public market’.155
THE BRITISH BUSINESS BANK IS INCREASING THE
AVAILABILITY OF EQUITY FINANCE TO UK SMEs
2019 was a positive year for UK SME equity finance
overall with increases in both deal numbers and
investment value. Despite increases in the amount
of capital available to growth stage companies, the
UK still lags behind the US in terms GDP-weighted VC
investment. British Patient Capital continues to have an
important role in providing later stage capital to UK
scale-ups, ensuring they have enough funding to reach
their full potential.
Fundraising conditions also improved in 2018 and 2019,
especially for first-time fund manager teams. This
highlights the success the Bank’s equity programmes,
particularly the Enterprise Capital Funds programme,
have had in reducing barriers to entry and enabling
new VC fund management teams to enter the market.
For instance, in 2019 the British Business Bank invested
in Ada Ventures’ first VC fund.156
Multiple data sources are now showing that the
performance of UK and European VC funds is competitive
against the performance of US funds. The Bank is the
largest UK-based investor in UK VC and has an important
role in developing the market, including addressing
information gaps. The Bank will therefore look to build
on the VC financial returns report that was published in
October 2019 by collecting new primary data on UK VC
fund performance, to provide more robust data on the
returns that are available from investing in UK venture.
Business angels are less likely than other investors to
publicly disclose their equity deals. To help increase the
amount of information available, the British Business Bank
will shortly publish a new survey of UK business angels
providing more information on their investment activities.
2.6 Equity finance
83
Small Business Finance Markets 2019/20
• The UK private debt market has developed
since 2010 but growth in the number of
mid-market deals has recently slowed
• The British Business Bank’s Investment
Programme has increased the supply of
flexible debt to smaller businesses
THE UK PRIVATE DEBT MARKET HAS DEVELOPED SINCE
2010 BUT GROWTH IN THE NUMBER OF MID-MARKET
DEALS HAS RECENTLY SLOWED
The UK private debt market has grown substantially
since its emergence in 2010 in response to tighter bank
lending conditions for businesses and a low interest rate
environment for investors. The asset class provides a
relatively attractive risk-adjusted return, diversification
and low volatility for its investors.157
Private debt funds provide bespoke debt financing
solutions, offering businesses an alternative source
of funding to banks, accommodating a more flexible
approach but typically with higher interest rates.
Providers of private debt offer quicker decision making,
more flexibility in deal structures and higher leverage
than banks, making private debt a useful alternative
option for growing businesses.
Although SME-focused private debt funds make up a
relatively small part of the overall lending market to
smaller businesses, the businesses in which these funds
invest, are typically growth orientated and therefore
make an important contribution to the UK economy.
There is less market data available on private debt deals
compared to private equity deals, in part due to private
debt being a less mature asset class in European markets.
Existing private debt data providers include Deloitte
through the Alternative Lending Tracker158 and Preqin
through the Private Debt Module.159 These datasets
mainly capture deals involving mid-market companies and
do not yet capture sufficient numbers of deals involving
smaller businesses.
British Business Bank
84
2.7 Debt funds
2.7 DEBT FUNDS
Figure B.60 shows Preqin and Deloitte have relatively
similar coverage of UK mid-market private debt deals
over time. Both data sources show that the number of
private debt deals going to mid-market companies in the
UK has increased since 2013, demonstrating UK private
debt markets have become more established. However,
market conditions have changed in 2018 and 2019.
Preqin shows growth in private debt deal numbers
slowed in 2018 with 135 deals completed, only one
higher than in 2017. Initial deal numbers for 2019,160
suggest a decline in the number of UK private deals in
2019 with 99 deals reported.
Whilst Deloitte shows there were 153 deals in 2018, up
from 138 in 2017, 2019 data shows there were only 65
private debt deals in the first half of the year. Unless
there is a particularly strong second half of the year, this
also suggests the number of private debt deals in 2019
could be lower than 2018 levels. This may be due to
cyclical factors, as well as the maturing of the mid-market
private debt market.
A similar picture is seen in Europe, with Preqin showing
449 private debt deals in 2018, a 1% increase compared
to 2017. Preqin suggests ‘with events like Brexit looming
large, market uncertainty could present difficulties for fund
managers in sourcing attractive deals on a risk-adjusted
basis and effectively deploying capital’.161 This raises the
importance of private debt fund managers preserving their
rigorous due diligence and underwriting processes, to
ensure credit quality is maintained.162
Business demand for private debt finance is also likely
to be influenced by wider market uncertainty. This is
particularly the case in the UK, where the capital for
62% of UK private debt deals in the last 12 months was
used for merger and acquisition (M&A) transactions.
As such the majority (82%) of mid-market private debt
deals in the UK are sponsored by private equity funds.163
European merger and acquisition activity in 2018 was at
its lowest level since 2010, with signs of further decline
in 2019.164 PitchBook notes ‘volume has waned in the
face of weak European economic indicators, growing
protectionism and the uncertainty surrounding Brexit’
and ‘dealmakers are evidently cautious, opting for a wait
and- see approach.’
0
40
80
120
160
2013
2014
2015
2016
2017
2018
Deloitte
Preqin
FIG B.60
NUMBER OF UK MID-MARKET PRIVATE DEBT DEALS OVER TIME,
BY DATA SOURCE
Source: British Business Bank analysis of Preqin (data accessed 27/11/2019) and
Deloitte Alternative Lender Tracker Autumn 2019
2.7 Debt funds
85
Small Business Finance Markets 2019/20
Whilst mid-market private debt deal activity has slowed
in the UK and Europe more generally in 2018 and 2019,
Preqin shows investment values have risen with larger
deals being undertaken in 2018.165 $33.4bn (£25.4bn) of
private debt funding went to UK companies in 2018, up
from $9bn (£6.8bn) in 2017, leading to larger deal sizes.
It should be noted that most of this capital has been used
to provide leverage in M&A transactions, rather than
going to SMEs in the form of growth capital.
UK mid-market private debt fundraising has been strong
in recent years with $27.1bn (£21bn) raised in 2019, up
52% compared to 2018.166 This fundraising has been
mostly concentrated in the largest and most mature
private debt fund managers in the market. For instance,
Alcentra and BlueBay, two large, established private debt
fund managers have both raised recently raised private
debt funds larger than €5.5bn (£4.6bn) in 2018 and 2019.
Mid-market private debt funds in the UK have large
amounts of capital available to deploy ($41bn or £31bn of
dry powder)167, which means fund managers are looking
for larger deals. This increase in liquidity is not just seen
in the private debt market but also the wider PE market,
resulting in greater competition for deals and higher
valuations. The liquidity at the mid-market level is unlikely
to trickle down to smaller deals in smaller companies.
THE BRITISH BUSINESS BANK’S INVESTMENT
PROGRAMME HAS INCREASED THE SUPPLY OF
FLEXIBLE DEBT TO SMALLER BUSINESSES
Whilst fundraising conditions for mid-market funds remain
strong with larger funds being raised, structural issues
mean that fund managers targeting smaller businesses
report ongoing difficulties in raising new funds.
The British Business Bank has played a catalytic role
in supporting the development and growth of SME-
focused private debt funds in the UK through the Small
Cap Business Finance Partnership and the Investment
Programme. As at 31st December 2019, the Bank had
committed £624m into 18 SME private debt funds and
is involved in a significant proportion of UK private debt
funds focused on lending to smaller businesses. These
funds provide a range of different types of debt and will
help the smaller business private debt market to build a
track record with investors.
The SME-focused funds supported by the British
Business Bank form an important part of the market,
not met by existing fund managers. The British Business
Bank’s Small Cap Business Finance Partnership and
Investment programme has supported £2.1bn of funding
into 201 businesses as at end of September 2019.
British Business Bank Management Information shows
an increase in activity for the Small-Cap Business Finance
Partnership and the Investment Programme from 2014
onwards. British Business Bank supported debt funds
lent £72m in 2014, but this has continually increased year
on year to £618m in 2018.
Figure B.61 shows the number of new companies funded
per year has also increased over time, with 42 companies
funded in 2018, up from 40 in 2017. Strong performance
is also seen in the three quarters of 2019 with 40
companies funded, suggesting continued growth in the
number of small company private debt deals in 2019.
Smaller companies are more likely to be using private
debt to fund growth, and so demand for this finance
is likely to be less affected by cyclical factors affecting
mergers and acquisitions.
Existing private debt data sources mainly capture
deals involving mid-market companies and do not yet
capture sufficient numbers of deals involving smaller
businesses. To address this information gap, the British
Business Bank is undertaking a new survey of private
debt fund managers in the UK, with a particular focus
on funds targeting smaller companies. This research will
identify the number of private debt deals going to SMEs
and the contribution these funded companies make to
the wider economy.
0
10
20
30
40
50
60
70
2014
2015
2016
2017
2018
£ Million0
100
200
300
400
500
600
700
Number of deals (LHS)
Investment value (RHS)
FIG B.61
BRITISH BUSINESS BANK SUPPORTED PRIVATE DEBT FUNDS,
NUMBER OF COMPANIES FUNDED AND INVESTMENT VALUE
PER YEAR
Source: British Business Bank MI data
British Business Bank
2.7 Debt funds
86
• Asset finance has continued to grow against
a backdrop of low business investment
• Diversity of providers and business models
in asset finance continues to grow
• Some asset finance providers are developing
expertise in sustainable technologies
• Our asset finance partners support all
regions and devolved nations
This section provides an update on developments in
the asset finance (leasing and hire purchase) markets
in 2019, highlighting the continued increase in new
business. Asset finance continues to be the alternative
finance instrument used by the largest proportion of
smaller businesses surveyed in the Business Finance
Survey (15% in 2019) with only bank overdrafts and
credit cards more frequently used.
The asset finance market, through the provision of leasing
and hire purchase, helps businesses invest in vehicles,
equipment and plant and machinery. Leasing allows
businesses to obtain new equipment by renting it for a
contracted period without owning it. If a business wants
to own the equipment at the end of the contract period,
then hire purchase is the appropriate finance option. In
both cases, businesses avoid paying the full cost of the
equipment upfront, easing pressures on cash flow.
ASSET FINANCE HAS CONTINUED TO GROW AGAINST
A BACKDROP OF LOW BUSINESS INVESTMENT
Asset finance growth has been resilient throughout the
year. Total asset finance new business (primarily leasing
and hire purchase) grew by 6% in 2019 whilst lending
to SMEs grew 4% (figure B.62). This was despite weak
business investment figures, driven by political and
economic uncertainty, with one experienced market
contact describing 2019 as “one of the most difficult
years of trading in my career”.
Whilst growth has been achieved, several contacts have
noted it is more difficult in terms of revenue as there
continues to be an increase in competition and pressure
on rates. This has partly been driven by new money
87
2.8 Asset finance
2.8 ASSET FINANCE
Small Business Finance Markets 2019/20
entering the sector, in particular from private equity,
a trend we first noted in the 2017/18 Small Business
Finance Markets report.168
2019 has seen the unique dynamic of Brexit dates
seemingly impacting the market. The FLA reported that
“In September, the asset finance industry reported its
strongest growth in new finance for plant and machinery
since January 2019 as businesses stockpiled ahead of
another Brexit deadline.”
This may be a result of a combination of factors such
as investment being brought forward ahead of a period
of uncertainty or before credit conditions worsen, as
suggested may be the case by the Q3 Bank of England
Credit Conditions survey.
In addition, stockpiling is thought to have increased
demand for plant and machinery finance to support
some SMEs’ increased inventories of raw materials and
goods as reported by the ONS in Q1 2019 and by some
market commentators in Q3. SME asset finance grew very
strongly in Q1, up 11% compared to the equivalent period
a year earlier.
The FLA breakdown shows the first three quarters of
growth was primarily driven by plant and machinery
finance and commercial vehicle finance. Some early
market commentary suggested the strength in
commercial vehicle finance could have been due to the
impending introduction of the EU regulation that requires
new commercial vehicles to have smart technographs
from June. However, both commercial vehicle finance and
the Society or Motor Manufacturers and Traders (SMMT)
new light commercial vehicle (LCV) registrations data
remained strong post the implementation. SMMT and the
FLA have both reported this as being down to operators
responding to regulatory changes and taking advantage
of good deals on the latest models available.
The full-year 2019 figures showed that the commercial
vehicle finance sector grew by 9% compared with 2018,
while plant and machinery finance and IT equipment
finance grew at the more modest rates of 5% and 3%
respectively. Business equipment finance was the only
asset category in negative territory (-2%) for the year.
The FLA are expecting further growth in 2020. Geraldine
Kilkelly, Head of Research and Chief Economist at the FLA
said in their December 2019 release: “Moving forward
with the Brexit process should reduce some of the
uncertainty that has weighed on business investment
since the EU membership referendum. This will provide
opportunities for further growth in the asset finance
market in 2020.”
2011201020132012201520142017201620182019200920072008Total (a)
Leasing
Hire purchase
SME asset nance
Other nance
FIG B.62
SIZE OF UK ASSET FINANCE MARKET FOR BUSINESSES -
NEW BUSINESS
Source: Finance & Leasing Association (FLA)
Asset nance new business for deals of up to £20 million
0
5
10
15
20
25
30
35
40
£ BillionBritish Business Bank
2.8 Asset finance
88
DIVERSITY OF PROVIDERS AND BUSINESS MODELS IN
ASSET FINANCE CONTINUES TO GROW
Strong competition and increasing diversity have been
recurring themes in the asset finance industry in recent
years, be it driven by new money and new entrants to the
industry, or evolving business models such as the rise of
digitalisation. This edition of the Small Business Finance
Markets report utilises the AF50 UK data for the first time
to analyse the composition of the asset finance industry.
AF50 UK looks at the outstanding asset finance reported
on the latest published balance sheets and is an annual
publication by Asset Finance International in association
with Asset Finance Policy.169
AF50 splits the data in a variety of ways including by
the type of provider. For 2017/18 it reports 52% of
outstanding asset finance was supplied by UK banks, 17%
by overseas banks and 31% by non-banks suggesting a
relatively unconcentrated market compared to many other
financial markets.
Included within the 52% is a 17% share for independent
challenger and specialist banks, a share that has been
steadily increasing since the AF50 UK report began in
2016. Within this the AF50 UK top 50 list includes several
challenger and specialist banks such as Aldermore and
Close Brothers which both appear in the top 10 and
Paragon and Metro Bank which only received their banking
licences in the last decade. Similarly, several of the
non-banks appearing in the latest report, such as White
Oak and Simply, are new additions to the top 50, joining
lenders like Haydock and Shire Leasing and evidencing the
increasing diversity among independent providers.
The FLA does not report data by ultimate funder type,
but it does report data by channel. Broker-introduced
finance, the fastest growing channel in 2017 and 2018
has continued to set the pace and was up 9% in 2019,
while the direct finance and sales finance channels grew
by 5% and 2% respectively.
The continued growth in broker-introduced finance is
despite some market contacts noting a number of brokers
leaving the market due to recent regulatory changes
including GDPR. Given both independent banks and
non-bank finance providers typically rely on broker driven
models more than the big banks the growth in broker-
introduced business and the independents’ balance sheets
appear to be symbiotic.
Diversity isn’t just about the number of providers though;
the differing business models and service offerings
available are also very important to customers. Whilst
digitalisation and servitisation have been on the agenda
for some time, 2019 saw several innovations from asset
finance providers.
Lombard launched a new instant agreement tool
and Aldermore launched an online portal to simplify
transactions between small businesses and their funding
providers. This latter tool lets brokers manage their
portfolio in one place, calculate and deliver quotes, submit
new business proposals, generate documentation and
electronically sign agreement documents. Alongside the
introduction of several asset finance provider apps, such
as Propel’s HowApp, this suggests the industry is starting
to implement some of the trends we have more readily
associated with FinTechs and digital banks.
SOME ASSET FINANCE PROVIDERS ARE DEVELOPING
EXPERTISE IN SUSTAINABLE TECHNOLOGIES
Recently we have also seen a fair amount of discussion
both within industry and government around the role
finance providers can and need to play in helping the
UK achieve decarbonisation goals. The legally binding
target to reach net zero emissions by 2050 will require
near complete decarbonisation of the UK’s economy
including power, buildings, surface transport, industry and
waste, as well as the removal of residual emissions using
greenhouse gas sequestration technologies.
On an individual basis an SMEs’ environmental footprint is
relatively low – and varies greatly within the set of SMEs
because of diverse sectoral focuses, business models and
sizes – but their aggregate impact is greater than that of
large businesses. Studies that have sought to quantify
industrial CO2 emissions by enterprise size indicate that
SMEs’ contribution is as high as 60-70% in industrialised
countries, though in the UK this number is considered to
be closer to 50%.170 As such, achieving carbon neutrality
will require considerable changes to how SMEs operate.
Research typically suggests that barriers to SMEs adopting
decarbonisation technology and practices are mostly
not related to access to finance. Instead, SMEs appear
to face challenges to decarbonisation because of the
internal characteristics of firms. These included a lack of
awareness of their impact on the environment and their
obligations in this regard, but that doesn’t mean there isn’t
a role for finance providers to help SMEs decarbonise.
2.8 Asset finance
89
Small Business Finance Markets 2019/20
In 2019 we have seen a growing focus on finance providers,
and in particular asset finance providers, with expertise
in sustainable or ‘green’ technologies and those who
operate a circular economy model. Both of these finance
options are potentially key to helping SMEs decarbonise.
Specialist finance providers are important because many
asset finance providers only lend against assets they
understand and can price with a high degree of confidence.
Some green solutions may well be difficult to value because
either it is new or complex, or because there has not been
a long existing secondary market leading to worries around
residual values. Specialist finance providers may be better
placed to mitigate some or all of these issues.
In addition, asset finance providers who follow a circular
economy approach help their customers to decarbonise.
Typically, this is through two approaches. One is to use
business models adapted to maximise utilisation of
products, eg through rental or sharing, thus reducing the
number of products that are required to carry out the
same amount of work and making sure resources are used
to the fullest. The second is via collection and recycling.
After use, products are taken through a differentiated
value recovery system in which materials are specifically
identified and sorted as a basis for high-quality recycling.
OUR ASSET FINANCE PARTNERS SUPPORT ALL REGIONS
AND DEVOLVED NATIONS
Whilst the distribution of bank lending mostly matches
that of SMEs (see section 2.3 SME finance at a local level)
this is not the case for many other types of finance. For
example, in 2018 the East Midlands was home to 6% of
SMEs, received 5% of SME bank lending and less than
1% of equity finance. For the first time we can use the
management information we receive from our delivery
partners to proxy how asset finance is distributed.
Aggregating this data from across all our relevant
programmes and delivery partners we can see the regional
split of British Business Bank facilitated asset finance is
broadly in line with SME distribution for many regions and
devolved nations but with some interesting differences.
London for example, received only 9% of the total asset
finance we facilitated in H1 2019, well below London’s SME
share of 18.6% (figure B.63). The South East and South
West also received three percentage points less than their
SME share.
Per centValue of asset nance facilitated by British Business Bank
programmes (2019 H1) (a)
SME population (2019)
FIG B.63
UK REGIONAL AND DEVOLVED NATION SHARES OF ASSET
FINANCE FACILIATED BY BRITISH BUSINESS BANK PROGRAMMES
AND THE SME POPULATION
Source: British Business Bank analysis of British Business Bank MI,
BEIS Business Population Estimates
(a) Data excludes those where no location was recorded
0
2
4
6
8
10
12
14
16
18
20
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire and HumberNorth EastNorth WestWalesScotlandNorthern IrelandBy contrast the remaining regions and devolved nations
received a share in line with their SME share or above. The
North West and the West Midlands topped the table with
five percentage points and three percentage points above
their SME shares respectively in 2019 H1. Whilst these are
not yet full year numbers, 2018 full year numbers showed
a very similar picture.
Unfortunately, there are no official published regional
breakdown figures for the industry so it is difficult to verify
how reflective of the wider industry our delivery partner
numbers are. As a sense check we have spoken with
several of our delivery partners and they have confirmed
the finance they provide utilising our support is reflective
of their wider book. In the future we hope to work with
a wider number of asset providers to get a greater
understanding of how much asset finance reaches both
different regions and sectors.
British Business Bank
2.8 Asset finance
90
• The value of outstanding advances to SMEs
is down slightly following the 2018 peak
• The average advance to the smallest
businesses has grown sharply
• Lending against stock has stalled, possibly
due to the expected extension of the
‘secondary preferential creditor status’
legislation
• Asset-based lenders are joining the green
revolution
• Our invoice and asset-based lending
partners support all regions and devolved
nations
Invoice finance & asset-based lending (IFABL) is a term
used to describe funding against a range of business
assets including accounts receivable (the debts owed to
a business by its business customers, often represented
by its invoices), stock and inventory, plant and machinery,
real estate and even (sometimes) intellectual property
and brands. In various forms, the principles underpinning
invoice finance and asset-based lending have enabled
funding to British businesses for centuries.
THE VALUE OF OUTSTANDING ADVANCES TO SMEs
IS DOWN SLIGHTLY FOLLOWING THE 2018 PEAK
SMEs outstanding advances averaged £9.3bn in IFABL
finance during the first three quarters of 2019 according
to the latest UK Finance numbers. This is down 2.1% on
the full-year average for 2018 when the series peaked at
£9.5bn and is likely to lead to the first full-year fall since
2015 (figure B.64).
All but one size band of SME experienced decreases
in advances with the exception of the very smallest
businesses (turnover below £500k). Year-to-date,
the value of outstanding advances to the smallest
businesses has averaged £838m, up from £737m in
2018, a new high for the series.
91
2.9 Invoice finance & asset-based lending
2.9 INVOICE FINANCE &
ASSET-BASED LENDING
Small Business Finance Markets 2019/20
The number of SMEs utilising IFABL finance continued
to fall in 2019 with the year-to-date quarterly average
below 38,000 for the first time since the series began in
2009. In Q3 2019, the latest data point available, 37,465
smaller businesses used IFABL finance, again the lowest
since the series began.
There is continued variation within size bands though.
Fewer SMEs in the two smallest size bands used IFABL
finance, a continuation of a trend seen more or less since
the start of the series. However, the number of businesses
with a turnover between £5m-£10m and £10m-£25m
using IFABL finance have increased marginally and are
currently both at series highs (figure B.65).
THE AVERAGE ADVANCE TO THE SMALLEST
BUSINESSES HAS GROWN SHARPLY
The fall in the number of the very smallest businesses
using IFABL finance and the sizeable increase in the
value of finance advanced to them means the average
advance per business has grown significantly in 2019
(13.7%). The 2019 year-to-date average is £70,836, up
from £60,705 in 2018. Each quarter so far in 2019 has
reported quarter-on-quarter growth at an average of just
under £6,000 meaning the average advance in Q3 2019
is 30% higher than in Q4 2018.
This increase in the average amount advanced to the
smallest businesses, when coupled with the usage
of other short-term finance types highlighted in the
bank lending chapter (2.4), suggests that some smaller
businesses may have encountered cashflow issues in
2019. The smallest businesses are more likely to require
funding for help with cashflow, covering a short-term
funding gap or helping with trading difficulties than
medium-sized businesses.171 This may have been in part
exacerbated by the increase in late payments highlighted
by BEIS data and several surveys carried out in 2019.
According to the ICAEW Q2 Business Confidence Monitor,
late payments from customers were a greater challenge
than a year ago for one in five businesses (20%) and
worse still (24%) if you are an SME. Previse, a payments
fintech, released corroborating analysis of over 10 million
invoices (representing more than £24bn of spending
by some of the UK’s largest buyers) in November. Their
analysis suggested that, while late payments were
common throughout the supply chain, the smallest
suppliers were paid 30 days late while firms charging the
biggest fees were paid, on average, less than a day late.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2011
2013
2015
2017
2019(a)
2009
£0 - £500,000
£500,001 - £1,000,000
£1,000,001 - £5,000,000
£5,000,001-£10,000,000
£10,000,001 - £25,000,000
SME Total (<£25m denition)
FIG B.64
NUMBER OF SMEs USING INVOICE AND ASSET-BASED FINANCE,
BY TURNOVER COHORT
Source: UK Finance, Bank of England and British Business Bank calculations
(a) 2019 data up to and including Q3
2011
2013
2015
2017
2019(a)
2009
£ Billion£0 - £500,000
£500,001 - £1,000,000
£1,000,001 - £5,000,000
£5,000,001-£10,000,000
£10,000,001 - £25,000,000
SME Total (<£25m denition)
FIG B.65
LEVELS OF QUARTERLY AVERAGE STOCK OF ADVANCES,
BY TURNOVER COHORT
Source: UK Finance, Bank of England and British Business Bank calculations
(a) 2019 data up to and including Q3
0
1
2
3
4
5
6
7
8
9
10
British Business Bank
2.9 Invoice finance & asset-based lending
92
Suppliers invoicing for a value less than £10,000 p.a. and
thus more likely to be smaller businesses, were on average
processed by buyers 35 days after being received, meaning
payment, usually due within 30 days, was late before the
invoice had even been approved. Large suppliers, on the
other hand, had their invoices prioritised, taking just three
days to be processed on average, while also being paid
faster after being approved. 
LENDING AGAINST STOCK HAS STALLED, POSSIBLY DUE
TO THE EXPECTED EXTENSION OF THE ‘SECONDARY
PREFERENTIAL CREDITOR STATUS’ LEGISLATION
The most widely known types of asset-based finance are
factoring and invoice discounting, collectively referred to
as invoice finance, where the debtor book comprises the
core ‘security’. Together they account for approximately
79% of the finance facilitated across all sizes of
businesses, by value of advances. However, in recent
years, asset-based lending, where finance is advanced
against business assets additional to the debtor book,
has grown albeit from a relatively low base. This has been
driven in large part by lending against stock which has
grown at an average of nearly 50% for the three years up
to 2018.
Given many smaller businesses have been stockpiling
in 2019 one could have expected this emerging finance
product to again grow strongly, however this has not
been the case with lending against stock increasing only
marginally in 2019 (1%). UK Finance, the industry body
that represents IFABL finance providers, notes that this is
likely to be in large part due to the proposed introduction
of secondary preferential creditor status which will
significantly degrade the value of floating charge assets –
such as stock – for lending purposes.
ASSET-BASED LENDERS ARE JOINING THE GREEN
REVOLUTION
Not to be outdone by asset finance providers, IFABL
finance providers are also looking to provide solutions
for those SMEs trying to decarbonise. One of the first
examples is Wesleyan Bank and Alterinvest Capital
who have launched a cash flow product for renewable
heat technology.
The non-domestic Renewable Heat Incentive (RHI) is
designed to help businesses, public sector and non-profit
organisations meet the cost of installing renewable heat
technologies. Payments are made quarterly over 20 years
and are based on the heat output of the installed system.
The cash flow solution offers an annual upfront payment
against the RHI subsidy.
OUR INVOICE FINANCE AND ASSET-BASED
LENDING PARTNERS SUPPORT ALL REGIONS AND
DEVOLVED NATIONS
As with asset finance, there are no official regional
breakdown figures for the industry published. Aggregating
the data from across all our relevant programmes we
can see the regional split of IFABL finance facilitated by
our programmes is broadly in line with SME distribution
for many regions and devolved nations but with some
interesting differences. London for example, received only
11% of IFABL finance in the first half of 2019, well below
London’s SME share of 18.6% (figure B.66).
The South East and South West also received four
percentage points and three percentage points less than
their SME share respectively. By contrast Scotland and
the West Midlands both received a significantly larger
share of IFABL finance compared to their share or SMEs
in 2019.
Per centValue of invoice nance and asset-based lending facilitated
by British Business Bank programmes (2019 H1) (a)
SME population (2019)
FIG B.66
UK REGIONAL AND DEVOLVED NATION SHARES OF INVOICE
FINANCE AND ASSET-BASED LENDING FACILIATED BY BRITISH
BUSINESS BANK PROGRAMMES AND THE SME POPULATION
Source: British Business Bank analysis of British Business Bank MI,
BEIS Business Population Estimates
(a) Data excludes those where no location was recorded
0
2
4
6
8
10
12
14
16
18
20
LondonSouth EastSouth WestEast MidlandsWest MidlandsEast of EnglandYorkshire and HumberNorth EastNorth WestWalesScotlandNorthern Ireland2.9 Invoice finance & asset-based lending
93
Small Business Finance Markets 2019/20
• Gross lending continues to grow but
the sector has experienced its first real
headwinds
• Returns have fallen across the industry,
but net yield has remained steady
• FCA have strengthened the UK regulatory
regime but respondents suggest more could
be done
• Marketplace lenders are responding to the
more challenging market
Marketplace lending is a term used to describe the
market mechanisms, usually online, that link lenders
and borrowers. Previously this was commonly referred
to as Peer-to-Peer lending, but as institutional investors
have become the main source of available finance this
is increasingly inappropriate. This section reviews
developments in this market using data from Brismo.
Brismo covers consumer, business, property, invoice
financing and crowdfunded debt. This section focusses
on business lending and invoice financing, which is
predominantly to SMEs.
British Business Bank
94
2.10 Marketplace lending
2.10 MARKETPLACE
LENDING
GROSS LENDING CONTINUES TO GROW BUT THE SECTOR
HAS EXPERIENCED ITS FIRST REAL HEADWINDS
Marketplace business lending continued to grow in 2019
providing an alternative source of finance for SMEs
seeking debt finance. According to Brismo, it increased
in the first three quarters of the year to £1.9bn. This is
12% higher than the same period last year (figure B.67),
in contrast to gross bank lending flows which have
declined slightly in 2019. However, the rate of growth
has slowed compared to previous years and the H1
figure of £1.27 billion was down 1% from H2 2018, the
first half-year on previous half-year fall since the data
series began in 2010.
Marketplace invoice financing also continued to grow in
2019, though only just at 1%, following a restatement
of historic numbers. Figures for 2016-2018 have been
significantly reduced with growth in 2018 adjusted down
from 105% to 29% following a 2% decline in 2017.
The total value of aggregate marketplace invoice finance
now stands at £362m for 2019.
The sector has however experienced headwinds
and press scrutiny in 2019. In May, Lendy fell into
administration, following months of questions and
concerns over the level of arrears and defaults.
FundingSecure, a marketplace pawnbroker and property
lender, also went into administration in October after
concerns around the management of client account
funds as well as the weak performance of its loan book.
Slowing growth has also impacted established lenders and
is reflected in Funding Circle cutting its forecast revenue
growth in half to 20%. Broader economic concerns in the
face of Brexit uncertainty have impacted both business
and consumer lending, meaning many lenders have seen
reduced demand for loans (see section 2.2: Use of external
finance). In addition, Funding Circle has tightened its
lending criteria, a move designed to protect returns for
those who have invested via the platform.172
2014
2015
2016
2017
2018
2019(a)
£ BillionBusiness Lending
Receivables
0
1
2
3
FIG B.67
GROSS UK MARKETPLACE LENDING, SPLIT BY TYPE
Source: British Business Bank analysis of Brismo data, Funding Circle and MarketFinance
(a) Business lending 2019 data up to and including Q3
2.10 Marketplace lending
95
Small Business Finance Markets 2019/20
RETURNS HAVE FALLEN ACROSS THE INDUSTRY,
BUT NET YIELD HAS REMAINED STEADY
Funding Circle’s tightening of lending criteria arrived
against a backdrop of falling returns across the industry
according to the Link Group Marketplace Lending Index.
Link Group, in association with Brismo, have attempted
to build a true picture of the investment performance
of all-sector marketplace loans for investors, taking into
account fees, costs, term length, and losses. Accounting
for these factors, the Link/Brismo Marketplace Lending
index shows that the net return on a portfolio made up
of all loans originated by the constituent platforms now
stands at 3.8%, the lowest on record. This has fallen from
5.5% in the second quarter of 2017 and is now a distance
from its most recent peak of 6.3% in 2016 (figure B.68).
This fall in net returns has been driven by an increase in
loss rates on loans. In the latest figures, losses reduced
the net return by 3.4 percentage points, well above the
2.1 percentage point reduction seen last year. Analysis
by Link/Brismo puts this down to a combination of the
weaker economic environment impacting a growing
minority of businesses and consumers’ ability to repay
loans and the rapid growth of some platforms exposing
them to riskier borrowers. They also note this has been
exacerbated by the dwindling usage of contingency
funds among platforms, exposing more loans to losses.
The second component in net returns is the net yield
(which accounts for the initial interest rate and platform
fees). This has remained steady at 7.2%. Although risk
has increased in the sector, growing competition among
lenders has also created a tougher pricing environment.
Despite the impact of rising loss rates, returns remain
healthy compared to other fixed income assets of a
comparable term, which should help to underpin demand.
Whilst these numbers are for all sectors of marketplace
lending rather than just business lending, given the
fact that is the largest sector it is unlikely returns and
yield on business lending will have behaved significantly
differently.
2014
2016
2010
2018
2019(a)
2012
Yield
Net Return
Net Loss
FIG B.68
MARKETPLACE LENDING RETURNS, YIELDS AND LOSSES
Source: Link Marketplace Lending Index, powered by Brismo
(a) 2019 data is up to and including Q2
Per cent-4
-2
0
2
4
6
8
10
British Business Bank
2.10 Marketplace lending
96
FCA HAVE STRENGTHENED THE UK REGULATORY
REGIME BUT RESPONDENTS SUGGEST MORE COULD
BE DONE
Following a consultation, in June the FCA confirmed new
rules for the industry. These included “placing a limit on
investments in P2P agreements for retail customers new
to the sector of 10 per cent of investable assets.” However,
this investment restriction will not apply to new retail
customers who have received regulated financial advice.
Despite this rule not coming in until December 2019 the
above changes have already had an impact on investors
as well as on marketplace lenders. Market contacts report
a few retail investors have been deterred from investing
in marketplace lending leading to a reduction in new retail
investor flows and several lenders have also implemented
the rule early, albeit in differing ways. Due to one or both
of these reasons, a number of lenders are seeking to
expand their investor base across institutional investors
to have a deeper and more permanent pool of capital.
In addition to the above restriction, the new rules also
cover a requirement to clarify governance arrangements,
systems and necessary controls; a strengthening of rules
on plans for the wind-down of platforms if they fail; and
setting out the minimum information that platforms need
to provide to investors. In general, these changes have
been welcomed, particularly following the marketplace
lender failures observed earlier in the year leaving retail
investors exposed to significant amounts of capital losses.
The new rules aim to push those lenders who do not
already have mature systems in place to move towards
more suitable governance arrangements, systems and
controls as the industry and lenders transition from being
start-ups. Should the worst still happen, the strengthening
of rules on plans for the wind-down of platforms will lead
to a more orderly outcome for all involved.
However, some respondents to the FCA’s consultation
and market contacts have expressed concerns these
changes do not go far enough. Whilst the above policies
mostly impact the running of the platforms, the main
concern expressed appeared to be about the lack of
clarity investors have when choosing where to put their
money in the first place.
Several respondents to the consultation considered the
nature of the information to be disclosed and the lack of
a prescribed format could potentially make it difficult for
borrowers and investors to compare information across
platforms. Against the backdrop of recent challenges,
this could be key for the sector as it matures further if it
is to attract greater institutional investment and retain
the faith of its existing and potential retail investors.
Perhaps as a result of the feedback the FCA note that
this is the one element of the regulation that they will
keep under review.173 They go on to say with respect
to reporting of historic performance, “…. we agree that
a convergence in standards across the industry would
be beneficial…. we consider that there may be a role
for industry participants to discuss best practice and
promote consistency of interpretation in some key areas,
perhaps via relevant trade associations.”
Following the implementation of the enhanced FCA rules,
the 36H Group has been launched by Innovate Finance,
the industry body which represents UK FinTech.174
The new Group succeeds the Peer-to-Peer Finance
Association (P2PFA) – a self-regulatory body established
in 2011 to lobby for regulation. Membership of the Group
is open to all lending platforms that are authorised and
regulated by the FCA under Article 36H legislation. Initial
members are Funding Circle, RateSetter, Zopa, Lending
Works and CrowdProperty.
MARKETPLACE LENDERS ARE RESPONDING TO THE
MORE CHALLENGING MARKET
Marketplace lending has grown rapidly providing an
alternative source of finance for many SMEs. The sector
has however reached a pivotal period with some key
challenges facing the industry.
First and foremost, marketplace lenders continue to seek
scale whilst also attempting to make a profit. Lenders
have taken several approaches to achieve this. These
have included diversifying product offerings and target
audiences, expanding overseas, partnerships with large
banks, partnerships with challenger banks, creating
specific funds to encourage institutional investment and
seeking banking licences.
At some point we will see the industry go through its first
full credit cycle which will test the strength and reliability
of sector funding. How it prepares, to diversify and
deepen the funding base, will be key.
2.10 Marketplace lending
97
Small Business Finance Markets 2019/20
ASSET FINANCE
The use of credit or leasing facilities provided by a
leasing provider to finance the acquisition of assets.
The asset finance provider will normally require security
to be taken on the asset itself and the cost of the
asset finance arrangements is spread over the life of
the asset.
ASSET-BASED FINANCE
Funding against a range of business assets including
accounts receivable, inventory, plant and machinery,
real property and even intellectual property and brands.
The most common types of asset-based finance include
factoring and invoice discounting (collectively referred
to as invoice finance) and asset-based lending.
BANK CAPITAL REQUIREMENTS
Standardised requirements for banks, whereby they
must hold liquid assets for a certain level of total assets.
These are enforced by regulatory authorities.
BUSINESS ANGELS
A high net worth individual who provides financing
to small businesses in exchange for an equity stake
in the business. Business angels are often thought
of as a bridge between loans from family and friends
and venture capital. Business angels may also provide
expertise in helping to run the business.
BUSINESS CHURN
The rate at which new businesses start-up and existing
business close over a period of time. In a competitive
economy, business churn can help to facilitate economic
growth as inefficient businesses close down and are
replaced by efficient ones.
CAPITAL MARKETS
The market where debt and equity instruments, such
as stocks and bonds, are issued, bought and sold.
Institutions and some businesses can use primary capital
markets to raise funds by issuing bonds and equity.
CHALLENGER BANKS
Usually defined as those banks outside of the Big Five
UK banks. Challenger banks include new entrants to the
market, spin-offs or dis-investments from large banks
and existing smaller banks seeking to grow. Some are
regionally based, whilst others provide only personal or
small business banking rather than the wide range of
services provided by the larger banks.
COLLATERAL
Assets pledged by the business as security for a loan,
so that in the event that the borrower defaults, the
collateral may be sold, with the proceeds used to satisfy
any remaining debt obligations.
British Business Bank
98
GLOSSARY
Glossary
CORE BANK LENDING PRODUCTS
Traditional forms of external finance which include:
Bank loans, overdrafts and credit cards.
CROWDFUNDING
Equity fundraising for businesses where relatively small
amounts of money are lent or invested by large numbers
of individuals, typically facilitated by online platforms.
DEBT FUNDS
A limited liability investment vehicle which invests in
businesses using debt instruments. Debt funds provide
businesses with bespoke debt finance that is often
focused on providing flexible finance for ‘event driven’,
growth orientated companies.
DISCOURAGEMENT
Businesses which would like to borrow but which do
not apply for bank finance because they either feel
they would be turned down (‘indirectly discouraged’), or
they’ve made informal enquiries but not proceeded with
their application because the bank seemed reluctant to
lend (‘directly discouraged’).
ENTREPRENEURIAL ECOSYSTEM
A set of entities such as businesses, investors and public
institutions that are connected through relationships and
processes that influence entrepreneurial outcomes in a
given area.
ENTERPRISE INVESTMENT SCHEME (EIS)
This is a tax relief scheme designed to increase the
amount of equity finance available to high growth
potential businesses by offering investors tax relief.
EXTERNAL FINANCE
Money obtained from lenders or investors outside
of the business and its directors with an expectation of
a financial return for making the money available.
FINTECH
Finance providers or financial service providers which use
technology and /or innovative delivery and assessment
models within the financial services industry.
FLOWS OF FINANCE
The gross flow of finance is the movement of money
from lenders or investors to businesses or individuals
(businesses only in this report) over a period of time.
The net flow refers to the gross flow, net of repayments
over the same time period. For instance the gross flows
of bank loans refers to the value of new loans issued
over a certain period, whereas the net flow of bank loans
is the value of new loans minus the value of repayments
over the same period. In theory, the net flow of bank
lending over a certain period should equal the change
in the stock over the same period, excluding any other
adjustments.
FUND MANAGER
A fund manager is responsible for implementing the
fund’s investment strategy and managing its portfolio.
GROWTH CAPITAL
Equity investment used for more developed, profitable
companies looking to expand or enter new markets.
HIGH GROWTH FIRM
There is no single definition of a ‘high growth’ firm. The
ONS define high growth firms as ‘All enterprises with
average annualised growth greater than 20% per annum,
over a 3-year period. Growth can be measured by the
number of employees or by turnover.’
HIGH NET WORTH INDIVIDUAL
High net worth individuals are people that have high
income and/or high net assets. These people are often
entrepreneurs who become angel investors.
HIRE PURCHASE (HP)
When a finance company buys the asset on behalf of the
customer, who then pays an initial deposit. The remaining
balance, plus interest, is then paid over an agreed period.
During this period, ownership rests with the finance
company, which is effectively hiring use of the asset to
the customer. Once the final payment is made, ownership
transfers to the customer.
INDUSTRIAL STRATEGY
The aim of the Government’s Industrial Strategy is to
boost productivity, create jobs and increase wages
across the UK with investment in skills, industries and
infrastructure.
Glossary
99
Small Business Finance Markets 2019/20
INITIAL PUBLIC OFFERING (IPO)
The first time a private owned company sells its shares
publicly on a listed stock exchange.
INSTITUTIONAL INVESTMENT
These are typically large organisations that make
investments in debt or equity funds as part of a wider
portfolio of investments. For example, investment
banks, insurers, pension funds and hedge funds.
INTELLECTUAL PROPERTY
Intangible and non-physical goods, which can include
names, ideas and computerised information. Ownership
of intellectual property can be asserted using Intellectual
Property Rights.
INVOICE FINANCE
When a third party agrees to buy a business’s unpaid
invoices for a fee. There are 2 types of invoice financing:
factoring and discounting. Factors - factoring finance
providers - purchase a businesses’ unpaid invoices and
advance most of the value of the invoices, with the
balance less any charges paid when the invoices are
paid by the end customer. Factors also manage the sales
ledger and collect payment from the end customer.
Discounting is like factoring except the client business
retains control over managing the sales ledger.
LEASE FINANCING
A contractual agreement where a leasing company
(lessor) makes an asset it owns available for use by
another party (a lessee), for a certain time period in
exchange for payment.
LOCAL AUTHORITY DISTRICT (LAD)
These are sub-regional authorities that make up local
government.
LOCAL ENTERPRISE PARTNERSHIP (LEP)
These are partnerships between local authorities and
businesses across England. There are currently 38 LEPs
operating across England whose responsibility it is to
generate growth in the area.
LOWER MIDDLE MARKET
The middle market sector comprises of companies sized
between larger SMEs and companies that have access to
wider capital markets.
MANAGEMENT BUYOUT (MBO)
The senior management of a company buying all of the
company's outstanding shares. The management of the
company will not usually have sufficient money to buy
the company outright themselves, but will use private
equity funding to support the purchase.
MARKETPLACE LENDING
Marketplace lenders are online platforms that enable
investors to lend to retail and commercial borrowers.
Unlike banks marketplace lenders do not take deposits or
lend themselves; as such they do not take any risk onto
their balance sheets. They make money from fees and
commissions received from borrowers and lenders.
MEZZANINE FINANCE
A form of debt-finance finance that combines features
of both debt and equity in a single instrument. Whilst
there is no single model, mezzanine debt usually contains
three distinct features: cash coupon; payment-in-kind
or PIK, which is only paid at the maturity of the loan;
and, warrants or a share in the profits or growth of the
company.
PATIENT CAPITAL
Provision of funding to businesses that are capital
intensive with long product lead times, typically but
not exclusively in life sciences, clean technologies and
advanced manufacturing sectors. Patient capital funding
follows on from proof of concept and early stage R&D
grant funding, and covers both debt and equity finance.
PEER-TO-PEER LENDING (P2P)
Peer-to-peer finance involves the use of internet-based
platforms to match online lenders with borrowers. Given
the increased investment from institutional investors,
the Bank typically now refers to marketplace lending.
PRIVATE EQUITY (PE)
Equity ownership in a business that is not publicly-
traded. Private equity involves investing in privately held
companies and most of the time, private equity investors
invest institutional money. Venture capital is a type of
private equity finance.
British Business Bank
Glossary
100
PUBLICLY LISTED COMPANY (PLC)
A company issuing shares, which are traded on the
open market, through a stock exchange. Individual and
institutional shareholders constitute the owners of a
publicly listed company, in proportion to the amount of
shares they own as a percentage of all outstanding shares.
SECURITISATION
A financial technology which pools individual illiquid
assets into liquid financial securities that can be sold on.
It is used by lenders to raise funds and manage their
risk exposure.
SEED CAPITAL
Equity investment generally used for R&D, and initial
concept or product development. Usually businesses
receiving the investment are pre-revenue.
SEED ENTERPRISE INVESTMENT SCHEME (SEIS)

This is a tax relief launched in 2012 to encourage
investors to finance early stage start-ups. The company
must be under 2 years old and it must have fewer than
25 employees.
SME/SMALLER BUSINESSES
These terms are used interchangeably in this report. This
typically refers to businesses which have less than 250
employees. An alternative definition is businesses which
have an annual turnover of less than £25m.
START-UP, SCALE-UP AND STAY-AHEAD
This relates to the British Business Bank segmentation of
SMEs, based on broad financing requirements. Start-up
solutions focus on enabling business set-up, scale-up on
business growth and stay-ahead schemes are generally
aimed at businesses aiming to retain or enhance their
position. When considering in the context of analysing
available survey data, start-ups are classified as trading
for no more than five years, scale-up and stay ahead
businesses are defined as those trading for more than
five years, with scale-ups reporting an ambition to grow.
STOCK OF LENDING
The total value of outstanding debt at a given point in time.
TRADE CREDIT
An agreement between a buyer and seller, whereby
the buyer of the goods or service does not need to pay
for those goods or services immediately but can delay
the payment for an agreed period of time. This can help
alleviate the cashflow of the buyer.
VENTURE CAPITAL (VC)
The provision of funding to a start-up or young business
with high growth potential. Venture capital differs to
business angels in that they invest other people’s money
(mainly institutions). These investments are very risky, and
so venture capitalists are looking for high financial returns.
WORKING CAPITAL
Money available for the day to day cash flow operations
of a company.
Glossary
101
Small Business Finance Markets 2019/20
1.
Nominal bank lending flows adjusted by the GDP deflator
2.
British Business Bank, BVCA and Diversity VC (2019), “UK VC and
Female Founders”
3.
See the following link for details: https://www.gov.uk/cma-cases/
review-of-banking-for-small-and-medium-sized-businesses-smes-
in-the-uk
4. https://www.british-business-bank.co.uk/finance-hub/
5.
The OECD definition is taken from their Entrepreneurship at a Glance
publication
6. See section 3.3 of British Business Bank Small Business Finance
Markets 2016/7
7. All complete catalogue of British Business Bank evaluations is
available at https://www.british-business-bank.co.uk/research/
8. British Business Bank analysis of Beauhurst data
9. Available at: https://www.british-business-bank.co.uk/wp-content/
uploads/2019/07/NPIF-early-assessment-report-FINAL_24-
July-2019.pdf
10. To be published in Spring 2020.
11. Bank of England Monetary Policy Report published in January 2020
12. https://www.fsb.org.uk/resources-page/small-businesses-hope-
that-night-is-darkest-before-the-dawn-as-confidence-plunges-to-
eight-year-low-on-eve-of-election.html
13. CBI, SME activity remains listless, https://www.cbi.org.uk/media-
centre/articles/sme-activity-remains-listless/
14. REC, JobsOutlook, https://www.rec.uk.com/research/jobsoutlook
15. IPSE, Freelancer Confidence Index Q3 2019, https://www.ipse.co.uk/
policy/confidence-index.html
16. Vogel, P. (2016). From Venture Idea to Venture Opportunity: https://
doi.org/10.1111/etap.12234
17. Ramoglou, Stratos and Tsang, Eric W.K. (2016) A realist perspective
of entrepreneurship: opportunities as propensities: https://journals.
aom.org/doi/10.5465/amr.2014.0281
18. Brown, R. and Mawson, S. (2019) Entrepreneurial ecosystems
and public policy in action: a critique of the latest industrial policy
blockbuster: https://doi.org/10.1093/cjres/rsz011
19. Isenberg (2011) The entrepreneurship ecosystem strategy as
a new paradigm for economic policy: Principles for cultivating
entrepreneurship: http://www.innovationamerica.us/images/
stories/2011/The-entrepreneurship-ecosystem-strategy-for-
economic-growth-policy-20110620183915.pdf and SQW (2019)
Entrepreneurial University Eco-Systems
20. Hart et al (2019) Global Entrepreneurship Monitor: United Kingdom
2018 Monitoring Report: https://www.gemconsortium.org/report/
gem-uk-2018-monitoring-report
21. Spin outs are just one form of research commercialisation, licencing is
another important route.
22. HMRC (2019) Enterprise Investment Scheme, Seed Enterprise
Investment Scheme and Social Investment Tax Relief: https://assets.
publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/804455/May_2019_Commentary_EIS_SEIS_
SITR_National_Statistics.pdf
23. Based on the simple extrapolation used in figure A.31
24. Spigel, B (2017) The Relational Organization of Entrepreneurial
Ecosystems. https://journals.sagepub.com/doi/abs/10.1111/
etap.12167 and Roundy, P. and Brockman, B. and Bradshaw, M. (2017)
The Resilience of Entrepreneurial Ecosystems: https://ssrn.com/
abstract=3026364
25. These are Bath and North East Somerset, North Somerset and
South Gloucestershire for Bristol and Ashfield, Broxtowe, Gedling
and Rushcliffe for Nottingham. The chart uses a log scale to plot
the density distributions across our case study ecosystems as the
variation in density is so great that a chart with a linear scale would
make comparisons between the ecosystems very difficult to make.
26. Mason, C. and Brown, R. (2014) Entrepreneurial Ecosystems
and Growth Oriented Entrepreneurship. Final Report to OECD:
http://lib.davender.com/wp-content/uploads/2015/03/
Entrepreneurialecosystems-OECD.pdf
27. Wirtz, J. and Ehrey, M. (2009) Creative Restruction – How Business
Services Drive Economic Evolution: https://www.researchgate.
net/profile/Michael_Ehret/publication/242336839_Creative_
restruction_-_how_business_services_drive_economic_evolution/
links/0deec52e6ac6db8916000000/Creative-restruction-how-
business-services-drive-economic-evolution.pdf
28. Definition used includes financial and insurance activities, legal
services, accountancy and management consultancy, advertising
and market research and other professional, scientific and technical
activities.
29. SQW (2019) Northern Powerhouse Investment Fund – Early
Assessment Report: https://www.british-business-bank.co.uk/
wp-content/uploads/2019/07/NPIF-early-assessment-report-
FINAL_24-July-2019.pdf Fund Managers involved in the Regional
Funds also provide similar support to companies receiving debt
finance
30. British Business Bank (2019) UK VC and Female Founders: https://
www.british-business-bank.co.uk/wp-content/uploads/2019/02/
British-Business-Bank-UK-Venture-Capital-and-Female-Founders-
Report.pdf
31. Wilson, N., Kacer, M. and Wright, M. (2019) Equity Finance and the
UK Regions: https://assets.publishing.service.gov.uk/government/
uploads/system/uploads/attachment_data/file/821902/sme-
equity-finance-regions-research-2019-012.pdf
32. Mason, C. and Harrison, T. (2006) After the exit: Acquisitions,
entrepreneurial recycling and regional economic development: https://
www.tandfonline.com/doi/abs/10.1080/00343400500450059
33. Based on global data, Pitchbook estimate that at least 5.7% of
entrepreneurs that achieved an exit between 2006 and 2016 became
angel investors and roughly 1.2% founded VC firms. Pitchbook (2019)
Serial Entrepreneurs: Does Lightning Strike Twice? https://pitchbook.
com/news/reports/4q-2019-pitchbook-analyst-note-serial-
entrepreneurs-does-lightning-strike-twice
34. Bone et al. (2019) The Impact of Business Accelerators and
Incubators in the UK: https://assets.publishing.service.gov.
uk/government/uploads/system/uploads/attachment_data/
file/839755/The_impact_of_business_accelerators_and_
incubators_in_the_UK.pdf
35. City of London, Camden, Hackney, Islington, Southwark, Tower
Hamlets and Westminster.
36. Ibid. (Bone et al.)
37. Ibid. (Bone et al.)
ENDNOTES
British Business Bank
102
Endnotes
38. Devigne, D. , Manigart, S. , Vanacker, T. and Mulier, K. (2018),
Venture Capital Internationalization: Synthesis and Future Research
Directions: https://onlinelibrary.wiley.com/doi/full/10.1111/
joes.12276
39. Gkypali, A., Love, J. and Roper, S. (2018) Export Status and
SME Productivity: Learning-to-Export Versus Learning-by-
Exporting: https://www.enterpriseresearch.ac.uk/wp-content/
uploads/2018/05/ERC-ResPap71-GkypaliLoveRoper-Final.pdf
40. London includes five NUTS2 regions; Inner London – West, Inner
London – East, Outer London – East and North East, Outer London –
South and Outer London – West and North West.
41. Startup Genome (2019) Global Startup Ecosystem Report 2019:
https://startupgenome.com/gser2019
42. London is ranked below Silicon Valley on the Talent and Experience
domains.
43. https://datasciencecampus.ons.gov.uk/faster-indicators-of-uk-
economic-activity/
44. https://www.gov.uk/government/statistics/business-population-
estimates-2019
45. Business Population Estimates, Methodology Note, https://assets.
publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/836574/METHODOLOGY___QUALITY_NOTE_
BPE.pdf
46. ONS, Business demography, UK: 2018 https://www.ons.gov.uk/
businessindustryandtrade/business/activitysizeandlocation/
bulletins/businessdemography/previousReleases
47. There is considerable business churn driven by growth in employment
and downsizing in addition to business birth and growth driving net
change in the number of businesses.
48. https://www.ons.gov.uk/economy/economicoutputandproductivity/
output/articles/economicactivityfasterindicatorsuk/
december2019#vat-data
49. Wholesale and Retail; Transportation and Storage; Accommodation
and Food; Information and Communication; Finance and Insurance;
Real Estate; Professional, Scientific and Technical; Administrative and
Support Services; Education; Human Health and Social Work; Arts,
Entertainment and Recreation; and Other Services.
50. Agriculture, Forestry and Fishing; Mining and Quarrying; Utilities;
Manufacturing; and Construction.
51. External finance includes overdrafts, credit cards, bank loans,
commercial mortgage, leasing or hire purchase, loans or equity from
family and friends or directors, invoice finance, grants, loans from
other third parties, export or import finance, crowd funding, asset-
based lending, or any other loan or overdraft facility.
52. Businesses which neither currently use, nor have any intention to use
any form of finance.
53. BVA BDRC, SME Finance Monitor, Q4 2019.
54. BVA BDRC, SME Finance Monitor, Q2 2019, http://www.bva-bdrc.com/
wp-content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
55. ‘Core’ forms of finance includes overdrafts, loans (including commercial
mortgages) and/or credit cards.
56. BVA BDRC, SME Finance Monitor, Q2 2019, http://www.bva-bdrc.com/
wp-content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
57. Bank of England, Credit Conditions Survey, Q4 2019, https://www.
bankofengland.co.uk/credit-conditions-survey/2019/2019-q4
58. Higher rates of overdraft and credit card use recorded in the Business
Finance Survey compared to the SME Finance Monitor could reflect
differences in the questionnaire: the former asks about forms of
finance the respondent currently uses whereas the SME Finance
Monitor asks about forms of finance the businesses uses.
59. British Business Bank (2020), Business Finance Survey 2019
60. Bank of England, Agents’ summary of business conditions, Q4 2019,
https://www.bankofengland.co.uk/agents-summary/2019/2019-q4
61. The FSB’s Small Business Confidence Index and Make UK’s
Manufacturing Outlook were amongst those reporting weakened or
negative investment intentions in 2019.
62. BVA BDRC, SME Finance Monitor, http://www.bva-bdrc.com/wp-
content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
63. BVA BDRC, SME Finance Monitor, Q4 2019.
64. BVA BDRC, SME Finance Monitor, http://www.bva-bdrc.com/wp-
content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
65. BEIS, Longitudinal Small Business Survey: SME employers, 2018,
https://assets.publishing.service.gov.uk/government/uploads/
system/uploads/attachment_data/file/803645/LSBS_2018_
employers.pdf
66. BEIS’ Longitudinal Small Business Survey, 2018, https://assets.
publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/812014/Longitudinal_Small_Business_
Survey_2018_-_panel_report.pdf
67. BEIS’ Longitudinal Small Business Survey, 2018, https://assets.
publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/812014/Longitudinal_Small_Business_
Survey_2018_-_panel_report.pdf
68. British Business Bank (2020), Business Finance Survey 2019
69. BVA BDRC, SME Finance Monitor, http://www.bva-bdrc.com/wp-
content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
70. Application rates reported here relate to the 10 quarters ending at Q4
of the quoted year, to pool base sizes for robust estimates.
71. British Business Bank analysis of SME Finance Monitor, Q2 2019.
72. NB. this refers to applications for all finance types, http://www.
bva-bdrc.com/wp-content/uploads/2019/12/SME-Monthly-charts-
October-FINAL.pdf
73. BVA BDRC, SME Finance Monitor, http://www.bva-bdrc.com/wp-
content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
74. Start Up Loans Y3 evaluation, https://www.british-business-bank.
co.uk/wp-content/uploads/2019/10/SUL-Evaluation-Year-3-Report-
June-2019_final.pdf
75. Bank of England, Credit Conditions Survey, Q4 2019, https://www.
bankofengland.co.uk/credit-conditions-survey/2019/2019-q4
76. British Business Bank (2020), Business Finance Survey 2019.
77. Equity crowdfunding and marketplace lending previously referred to
as crowd funding platforms and peer to peer lending respectively,
British Business Bank, Business Finance Survey (2020).
78. British Business Bank (2020), Business Finance Survey 2019.
79. British Business Bank, Small Business Finance Markets report
2018/19, https://www.british-business-bank.co.uk/research/small-
business-finance-markets-report-2019/
80. BVA BDRC, SME Finance Monitor, http://www.bva-bdrc.com/wp-
content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
81. British Business Bank (2020), Business Finance Survey 2019.
82. British Business Bank (2020), Business Finance Survey 2019.
83. BEIS, Longitudinal Small Business Survey, 2018, https://assets.
publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/812014/Longitudinal_Small_Business_
Survey_2018_-_panel_report.pdf
84. British Business Bank (2020), Business Finance Survey 2019.
85. British Business Bank (2020), Business Finance Survey 2019.
103
Small Business Finance Markets 2019/20
Endnotes
86. British Business Bank (2020), Business Finance Survey 2019.
87. British Business Bank analysis of SME Finance Monitor Q2 2019,
http://www.bva-bdrc.com/wp-content/uploads/2019/09/BVABDRC_
SME_Finance_Monitor_Q2_2019.pdf
88. British Business Bank 2018 Business Finance Survey – Ipsos MORI.
89. British Business Bank 2018 Business Finance Survey – Ipsos MORI.
90. https://www.gov.uk/government/news/broad-new-measures-to-
ensure-small-businesses-get-paid-on-time
91. In this context security refers to an asset to be held against the
proposed debt facility.
92. Bahaj, Foulis and Pinter (2017) Home values and firm behaviour:
https://www.bankofengland.co.uk/-/media/boe/files/working-pa-
per/2017/home-values-and-firm-behaviour.pdf?la=en&hash=514B-
C7258844E79E3ABBE2AE191B7D452DD5BA2A
93. British Business Bank (2019) Small Business Equity Tracker: https://
www.british-business-bank.co.uk/wp-content/uploads/2019/06/
Small-Business-Equity-Tracker-2019.pdf
94. Data on high growth business are only currently available up to the
period ending in 2017.
95. This is a separate Local Authority District to Cambridge, which had 21
deals in Q1 – Q3 of 2019.
96. 87% of business angels made use of EIS or SEIS for at least one
of their investments. British Business Bank (2018) Business Angel
Report: https://www.british-business-bank.co.uk/wp-content/
uploads/2018/06/Business-Angel-Reportweb.pdf
97. Investee locations are based on registered addresses which may not
be the address where business is carried out. Investors making use of
both EIS and SEIS scheme will be double counted in totals.
98. Funding Circle and Oxford Economics (2019) The Big Business of
Small Business: https://www.fundingcircle.com/uk/impact
99. Cambridge Centre for Alternative Finance (2018), The 4th UK
Alternative Finance Investment Report: https://www.jbs.cam.ac.uk/
fileadmin/user_upload/research/centres/alternative-finance/
downloads/2017-12-ccaf-entrenching-innov.pdf
100. BoE Bankstats https://www.bankofengland.co.uk/statistics/tables
101. BVA BDRC, SME Finance Monitor, 3 months to December 2019,
https://www.bva-bdrc.com/products/sme-finance-monitor/
102. BoE, Credit Conditions Survey, Q2 2019 https://www.bankofengland.
co.uk/credit-conditions-survey/2019/2019-q2
103. BoE, Credit Conditions Survey, Q4 2019 https://www.bankofengland.
co.uk/credit-conditions-survey/2019/2019-q4
104. BVA BDRC, SME Finance Monitor, Q2 2019 http://www.bva-
bdrc.com/wp-content/uploads/2019/09/BVABDRC_SME_Finance_
Monitor_Q2_2019.pdf
105. BVA BDRC, SME Finance Monitor, 3 months to December 2019 http://
www.bva-bdrc.com/wp-content/uploads/2019/12/SME-Monthly-
charts-October-FINAL.pdf
106. BVA BDRC, SME Finance Monitor, Q2 2019 https://www.bva-bdrc.
com/products/sme-finance-monitor/
107 BoE, Agents’ summary of business conditions, Q4 2019 https://www.
bankofengland.co.uk/agents-summary/2019/2019-q4
108. BoE, Credit Conditions survey, Q4 2019 https://www.
bankofengland.co.uk/credit-conditions-survey/2019/2019-q4
109. https://www.bankofengland.co.uk/boeapps/database/
110. The effective interest rate is the weighted average of all the interest
rates across each type of deposit or loan account held by all clients
within an economic sector. The Bank of England calculates average
effective rates as weighted averages of the effective interest rates
supplied by each of the institutions.
111. European Commission and European Central Bank, Survey on the
Access to Finance of Enterprises, 2019 https://ec.europa.eu/growth/
access-to-finance/data-surveys/
112. OECD, Financing SMEs and Entrepreneurs, 2019 https://www.oecd-il-
ibrary.org/sites/fin_sme_ent-2019-en/index.html?itemId=/content/
publication/fin_sme_ent-2019-en&_csp_=d95445dab35fcd2d4b-
065dd056316ffa&itemIGO=oecd&itemContentType=book
113. The five largest banks in the UK are HSBC Bank plc, Lloyds Banking
Group plc, Royal Bank of Scotland Group plc, Barclays Bank plc and
Santander UK
114. PwC UK, Who are you calling a ‘challenger bank’?, 2017 https://www.
pwc.co.uk/industries/banking-capital-markets/insights/challenger-
banks.html
115. Virgin Money UK was formed when CYBG acquired Virgin Money in
2019. CYBG consisted of Clydesdale Bank, Yorkshire Bank and B
(an app-based bank that was discontinued in December 2019)
116. OneSavings Bank acquired Charter Court Financial Services in 2019
117. UK Finance, Mid-tier banking: Creating a level playing field for
competition, 2019 https://www.ukfinance.org.uk/system/files/
UK%20Finance%20Mid-tier%20banking%20report_FINAL%20
ONLINE.pdf
118. British Business Bank, The Benefits of Diverse Smaller Business
Finance Markets, 2017 https://www.british-business-bank.co.uk/
wp-content/uploads/2017/10/291-Diversity-Report-2017-Final.pdf
119. A full bank licence permits a firm to provide regulated products and
services, eg accepting deposits, providing credit, giving investment
advice, offering buy-to-let mortgages etc. A restricted banking
licence also allows a firm to provide regulated products and services
but places a limit on the financial services activity they can offer, eg
not carry on any activity that would constitute buy-to-let mortgage
business etc
120. In 2013 a review of requirements for firms entering into or
expanding in the banking sector stated that the PRA and the FCA
would implement change along two dimensions: reforms to the
authorisation process; and a major shift in the approach to the
prudential regulation of banking start-ups https://www.fca.org.uk/
publication/archive/barriers-to-entry.pdf
121. UK ring-fencing legislation required each large UK bank to separate
their retail banking activity from the rest of the business by the start
of 2019
122. B-North aims to focus on lending to SMEs in northern England
https://specialistbanking.co.uk/article-desc-7166_b-north-submits-
its-banking-licence-application
123. Recognise is a subsidiary of City of London Group that aims to serve
SMEs and personal and business savings markets https://www.
mortgagesolutions.co.uk/news/2019/11/01/city-of-london-group-
poised-to-request-banking-licence/
124. https://www.morningstar.co.uk/uk/news/
AN_1564578457355223000/distribution-finance-capital-to-re-
submit-banking-licence;-loans-rise.aspx
125. https://www.cityam.com/its-time-revolut-secures-full-european-
banking-licence/
126. https://www.fca.org.uk/brexit/what-implementation-period-would-
mean
127. The Co-operative Bank’s commercial loans as a share of its loan book
is lower than for Clydesdale Bank and Metro Bank. This follows the
Co-operative Bank experiencing governance issues and halting new
lending to businesses in the past decade
128. https://www.bdo.co.uk/en-gb/news/2020/lending-to-customers-
by-uk-challenger-banks-reached-record-115bn-last-year
129. Santander UK stopped writing any new asset finance business at
the end of 2019 and the existing portfolio will reduce as customers
complete payment schedules https://www.verdict.co.uk/leasing-life/
news/santander-to-exit-uk-asset-finance-market/
130. When Barclays Bank took a stake in MarketInvoice in 2018, Barclays
Business Bank CEO Ian Rand said “Barclays already offers invoice
financing to larger businesses, so it’s great news that we’re able to
extend the proposition to work for our smaller business customers as
well” https://www.finextra.com/newsarticle/32478/barclays-bank-
takes-stake-in-marketinvoice
British Business Bank
104
Endnotes
131. Business banking service quality - Great Britain, August 2019 https://
www.bva-bdrc.com/products/business-banking-service-quality-
great-britain/
132. https://www.finextra.com/pressarticle/80083/in-the-red-revolut-
reports-350-increase-in-revenues
133. Equity finance is also provided through public markets, but this is not
covered in this section.
134. British Business Bank (2020) ‘Business Finance Survey 2019’
135. British Business Bank (2020) ‘Business Finance survey 2019’
136. EU countries only. British Business Bank analysis of PitchBook (16th
January 2020).
137. 2016-2018 years are chosen for consistency with available GDP data.
138. Dealroom (2020) ‘2019: A record year for VC investment in the UK’
https://blog.dealroom.co/wp-content/uploads/2020/01/2019-A-
record-year-for-VC-investment-in-the-UK.pdf
139. As at 16th January 2020, the UK contributed 18 out of Europe’s 43
unicorn businesses.
140. Natwest (2018) ‘Mid-market Britain 2018‘ https://natwest.
contentlive.co.uk/content/midmarket-britain-2018
141. https://life.spectator.co.uk/articles/the-patient-capitalists-why-
private-equity-is-a-force-for-good/
142. https://www.bvca.co.uk/Portals/0/library/documents/Case%20
Studies/Manufacturing%20-%20PEGL%20-%20Case%20Study.
pdf?ver=2016-11-01-115051-597
143. https://www.mobeus.co.uk/portfolio/entanet
144. British Business Bank- Small Business Finance Markets 2018/19,
https://www.british-business-bank.co.uk/wp-content/
uploads/2019/02/British_Business_Bank_Small-Business-Finance-
Report-2019_v3.pdf
145. Preqin (2019) ‘Markets in Focus: Alternative Assets in Europe’
https://docs.preqin.com/reports/Preqin-Markets-in-Focus-
Alternative-Assets-in-Europe-July-2019.pdf
146. Atomico (2019) ‘The State of European Tech 2019’, https://2019.
stateofeuropeantech.com/chapter/key-findings/
147. British Business Bank/ Oliver Wyman (2019) ‘The Future of Defined
Contribution Pensions’ https://www.british-business-bank.co.uk/wp-
content/uploads/2019/09/Oliver-Wyman-British-Business-Bank-
The-Future-of-Defined-Contribution-Pensions.pdf
148. British Business Bank (2019) ‘Analysis of UK VC Financial Returns’
https://www.british-business-bank.co.uk/finance-hub/wp-content/
uploads/2019/10/BBB-VC-Financial-Report-FINAL-VERSION-
17Oct2019.pdf
149. Atomico (2019) ‘The State of European Tech 2019’ https://2019.
stateofeuropeantech.com/chapter/key-findings/
150. Atomico (2019) ‘The State of European Tech 2019’ https://2019.
stateofeuropeantech.com/chapter/key-findings/
151. ‘Exits’ as referred to in this section include management buyouts,
mergers/acquisitions and IPO’s
152. PitchBook NVCA (2019) ‘Venture Monitor 3Q 2019’ https://files.
pitchbook.com/website/files/pdf/3Q_2019_PitchBook_NVCA_
Venture_Monitor.pdf
153. Atomico (2019) ‘The State of European Tech 2019’, https://2019.
stateofeuropeantech.com/chapter/key-findings/
154. PitchBook (2019) ‘Ex-unicorn stocks are taking in a post-WeWork
world’ https://pitchbook.com/news/articles/ex-unicorn-stocks-are-
tanking-in-a-post-wework-world
155. Beauhurst (2019) ‘Upcoming IPOs 2020: will these companies IPO
this year?’ https://about.beauhurst.com/blog/upcoming-ipos-2020/
156. https://www.british-business-bank.co.uk/ada-ventures-closes-
flagship-34m-fund-to-invest-in-overlooked-founders/
157. Preqin (2018) ‘Preqin Markets in Focus: Alternative Assets in
Europe’ https://docs.preqin.com/reports/Preqin-Markets-in-Focus-
Alternative-Assets-in-Europe-July-2019.pdf
158. Deloitte (2019) ‘Deloitte Alternative Lender Tracker Autumn 2019’
https://www2.deloitte.com/uk/en/pages/financial-advisory/articles/
alternative-lender-deal-tracker.html
159. https://www.preqin.com/
160. As of 30/01/2019. There is likely to be a time lag in fund managers
publicly disclosing their private debt deals.
161. Preqin (2019) ‘Preqin Markets in focus: Alternative assets in
Europe’ https://docs.preqin.com/reports/Preqin-Markets-in-Focus-
Alternative-Assets-in-Europe-July-2019.pdf
162. Financial Times (2019) ‘Alcentra and BlueBay raise jumbo-sized ‘direct
lending’ funds’ https://www.ft.com/content/0176ace5-7399-3c86-
9059-1a62d6c13e14
163. Deloitte (2019) ‘Deloitte Alternative Lender Tracker Autumn 2019’
https://www2.deloitte.com/uk/en/pages/financial-advisory/articles/
alternative-lender-deal-tracker.html
164. PitchBook (2019) ‘European M&A Report Q3 2019’ https://files.
pitchbook.com/website/files/pdf/PitchBook_3Q_2019_European_
MA_Report.pdf
165. This is also confirmed in the M&A deal value figures where 2018
remains high (€1,140bn)
166. British Business Bank analysis of Preqin (data accessed 30/01/2020)
167. British Business Bank analysis of Preqin (data accessed 30/01/2020)
168. https://www.british-business-bank.co.uk/wp-content/
uploads/2018/02/Small-Business-Finance-Markets-2018-Report-
web.pdf
169. https://www.assetfinanceinternational.com/index.php/cio/cio-
articles/18289-af50-2019-reveals-uk-s-biggest-asset-finance-
companies
170. SMEs and the Environment in the European Union, 2010
171. BVA BDRC, SME Finance Monitor, Q2 2019, http://www.bva-bdrc.com/
wp-content/uploads/2019/09/BVABDRC_SME_Finance_Monitor_
Q2_2019.pdf
172. https://www.ft.com/content/d44b23e0-9c90-11e9-9c06-
a4640c9feebb
173. https://www.fca.org.uk/publication/policy/ps19-14.pdf
174. https://www.innovatefinance.com/news/innovate-finance-launches-
36h-group/
105
Endnotes
Small Business Finance Markets 2019/20
The British Business Bank’s mission is to help drive economic growth by making finance markets
work better for smaller businesses – wherever they are in the UK and wherever they are on their
business journey – enabling them to prosper and grow.
In 2019/20 one of our key objectives is being the centre of
expertise on smaller business finance in the UK, providing
advice and support to the Government. Being the centre
of expertise on smaller business finance gives us the
knowledge and credibility to achieve our other objectives,
and to help the Government deliver key policy priorities.
We use insights gained from our extensive research and
analysis programme to produce publications about UK
smaller business finance markets, take part in policy
debates, and to provide input into cross-governmental
projects.
OUR LATEST RESEARCH
ANALYSIS OF UK VC FINANCIAL RETURNS REPORT
This report provides the most comprehensive
and robust approach to date for assessing the
comparative performance of UK Venture Capital (VC)
funds compared to US VC funds since 2002. It draws
together data from existing data sources including
PitchBook and Preqin, and from the British Business
Bank’s own programmes. The report provides as
comprehensive a picture as possible of the Venture
Capital asset class and its performance and makes a
specific case for UK VC within global VC allocations.
https://www.british-business-bank.
co.uk/analysis-of-uk-vc-financial-
returns
THE FUTURE OF DEFINED CONTRIBUTION PENSIONS
This report provides an in-depth assessment of
the case for defined contribution (DC) pension
scheme investment in venture capital and growth
equity and proposes solutions to overcome key
risks and challenges to access. It aims to enable
better long-term retirement outcomes for the UK’s
defined contribution pension savers, with a focus on
commercial solutions that could be implemented in
the private sector.
https://www.british-business-bank.
co.uk/research/the-future-of-
dc-pensions-enabling-access-to-
venture-capital-and-growth-equity
GOING DIGITAL: THE CHALLENGES FACING
EUROPEAN SMES – EUROPEAN SME SURVEY 2019
The National Promotional Institutions of France
(Bpifrance), Germany (KfW), Poland (BGK), Spain
(ICO) and the United Kingdom (British Business Bank)
collaborated on a study examining the challenges of
digitalisation for European small and medium-sized
enterprises. The study is based on a first-time joint
survey of more than 2,500 SMEs in the participating
countries, the European SME Survey.
SMEs create a large share of employment in Europe,
generally are in sound shape and experience robust
revenue growth. This is not least due to their
competitiveness on both national and international
markets.
To remain a driving force of the European economy,
SMEs must increasingly invest in digitalisation. For
European SMEs to advance further in the digital
transformation process, a variety of obstacles must
be overcome, including IT security concerns and a lack
of digital infrastructure. A quarter of SMEs perceive
a lack of appropriate financing possibilities as a key
barrier to digitalisation in their company. Another
important problem from the point of view of European
SMEs are insufficient digital skills – both among their
own workforce and on the external labour market.
https://www.british-business-bank.co.uk/going-digital-
is-a-challenge-for-european-small-and-medium-sized-
enterprises-but-key-to-remain-competitive/
British Business Bank
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ACKNOWLEDGEMENTS
This report was developed by the British Business Bank Economics Team including Matt Adey, Alasdair Barrett,
Joel Connolly, Asad Ghani, Anthony Gray, Jake Horwood, Alice Hu Wagner, Naren Mistry, Fiona Morrill, Leath Al Obaidi,
Tom Purvis, Dan van der Schans, Sam Whitehurst and Zach Witton. We would like to thank all who provided input
and comments on the report.
LEGAL NOTICES
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or accuracy of any facts or opinions contained in this report. Recipients should seek their own independent legal,
financial, tax, accounting or regulatory advice before making any decision based on the information contained herein.
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taken or refrained from as a result of information contained in this report.
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Small Business Finance Markets 2019/20
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