SMALL BUSINESS
FINANCE MARKETS
2017/18





















































































































































3
CONTENTS
3
FOREWORD
5
EXECUTIVE SUMMARY
8
INTRODUCTION
9
AGGREGATE FLOW AND STOCK OF FINANCE TO SMALLER BUSINESSES
12 MACROECONOMIC DEVELOPMENTS
14 PART A: THEMES
15 1.1 DEMAND FOR FINANCE
23 1.2 REGIONAL ACCESS TO FINANCE
28 1.3 PATIENT CAPITAL FOR SCALEUPS
31 1.4 INTERNATIONAL COMPARISONS OF SMALL BUSINESS FINANCE MARKETS
38 PART B: MARKET DEVELOPMENTS
SMALL BUSINESSES
39 2.1 SME BUSINESS POPULATION
43 2.2 HIGH GROWTH FIRMS
48 2.3 USE OF EXTERNAL FINANCE
FINANCE PRODUCTS
53 2.4 BANK LENDING
58 2.5 EQUITY FINANCE
64 2.6 DEBT FUNDS
68 2.7 ASSET FINANCE AND INVOICE & ASSETBASED LENDING
74 2.8 MARKETPLACE LENDING
78 GLOSSARY
82 ENDNOTES
2
BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2017/18
FOREWORD
KEITH MORGAN,
CEO, BRITISH BUSINESS BANK
The British Business Bank was established at the end of 2014, with a mission to improve ÿnance
markets so they more e¤ectively serve the needs of smaller UK businesses.
This report, our fourth Small Business Finance Markets
report, highlights a continued and welcome growth in
ÿnance ow to smaller business outside of traditional
bank lending products. The value of equity investment
(up 79% in 2017), asset ÿnance (up 12%) and peer-
to-peer business lending (up 51%) used by smaller
businesses all showed signiÿcant growth in 2017,
while net bank lending remained relatively at.
That smaller businesses are using an increased range
of ÿnance options is relevant to two of the British
Business Bank’s key objectives: to increase the
diversity of supply by supporting new ÿnance market
entrants and innovative funding models; and to build
smaller businesses’ conÿdence and awareness of
their ÿnance options, including through our popular
Business Finance Guide, co-published with the ICAEW.
Although traditional banks are still the predominant
source of ÿnance, it’s encouraging to see smaller
businesses considering and using an increased
range of ÿnance options to meet their funding
needs. We strongly believe that matching smaller
businesses with appropriate ÿnance options will
ultimately help them, and the UK economy, develop
more successfully.
The British Business Bank uses evidence and research
to shape and develop our programmes. Three themes
from this year’s Small Business Finance Markets report
are already bringing signiÿcant change to our activities:
enabling greater provision of patient capital in
the forms of equity and wider growth capital;
stimulating demand for ÿnance; and tackling
regional imbalances in ÿnance supply.
PATIENT CAPITAL
This report highlights strong evidence that our
scale-ups need more long-term patient capital
throughout all stages of their development if
we want to compete with the US, for example,
in producing world-beating companies. It echoes
the themes explored in detail in last year’s Patient
Capital Review, led by HM Treasury and supported
by a separate industry panel chaired by Sir Damon
Bułni. The evidence shows there are some key areas
where improvements can be made – for example,
compared to their US counterparts, UK Venture Capital
funds are smaller on average (£118m compared to
£180m), and UK businesses that exit receive fewer
funding rounds (an average of 1.9 rounds compared
to 2.7 rounds).
Although the Bank had already begun increasing its
resources allocated to supporting equity for scale-up
companies, the Autumn Budget, represented a step
change in our capabilities. In an innovative package,
the government allocated £2.5bn of additional
resources to the British Business Bank, an increase
of around two thirds on our existing capacity. Along
with existing resources, this signiÿcant increase will
unlock up to £13bn of ÿnance to help UK smaller
businesses realise their full potential and, over time,
help broaden and deepen these markets through
attracting private sector capital – the central goal
of the Patient Capital Review, and one we share.














































































































































4 BRITISH BUSINESS BANK
5
SMALL BUSINESS FINANCE MARKETS 2017/18
TACKLING REGIONAL IMBALANCES IN
FINANCE SUPPLY
Demand variations are also apparent on a regional
basis, compounding the imbalance in supply of growth
capital across the UK. In 2017 the volume and value
of equity received by London-based businesses
exceeded that for the rest of the country combined.
Angel deals are also concentrated in London and
the South East. Increasing such activity in regions
outside London and the South East has the potential
to help close well-documented imbalances in
regional growth.
The Bank is addressing some of these imbalances
directly through our Northern Powerhouse and
Midlands Engine Investment Funds – with a fund
for Cornwall and the Isles of Scilly expected in 2018.
Whilst these supply-side activities are important,
we see a signiÿcant potential to rebalance activity
through better provision of information and building
capacity in the regions to support ÿrms’ growth
ambitions. Awareness and consideration of di¤erent
forms of ÿnance varies signiÿcantly across the country,
and our renewed e¤orts to close information gaps will
have a strong regional element. In response to the
government’s 2017 Industrial Strategy, we are also
developing an investment programme to support the
development of clusters of business angels outside
London, and will be putting in place a network of British
Business Bank regional managers by Autumn 2018.
Strong research, evidence and analysis provides the
basis for our interventions to improve ÿnance markets
for smaller UK businesses. This report highlights
areas where we have already begun to respond to
current challenges, and where we might respond
further to those that lie ahead. We look forward
to working with our partners and stakeholders to
address the growing needs of smaller businesses
as we do so.
Two key elements of the Budget announcement are
being implemented this year:
• A new £2.5bn Patient Capital entity, incubated
within the Bank, which will invest commercially
into venture and growth capital with a view to
œotation or sale – subject to a value for money
assessment – once it has built its portfolio and
track record
• Using up to an additional £500m, we will
cornerstone a small number of large scale,
private sector managed funds of funds,
which will in turn catalyse patient investment
into high potential businesses.
STIMULATING DEMAND
Supply of ÿnance is, however, just one side of the
equation and other activities need to be undertaken
to build capacity and capabilities amongst SMEs.
One such area is information, which is a fundamental
building block for ełcient, well-functioning markets.
Our research shows that this is an aspect of smaller
business ÿnance markets that could be strengthened
as, too often, businesses either aren’t aware of or
don’t understand the variety of ÿnance choices
available to them.
The Bank has already taken action to address this
problem. Thousands of businesses a week access the
British Business Bank/ICAEW Business Finance Guide,
which provides information about ÿnance options
for businesses at all stages of their development.
We recognise, however, that there’s more to be done.
We are introducing a more targeted new digital
information hub in Spring 2018, and will be backing it
with a substantial promotional campaign to maximise
its use by smaller businesses. The new hub, which will
set out ÿnance options in a simple to use format,
aims to go further in equipping businesses, and
especially those with growth ambitions, with the
know-how to ÿnd the ÿnance best suited to their
needs, enabling them to become the global success
stories of tomorrow.
EXECUTIVE
SUMMARY
The fourth edition of our Small Business
Finance Markets report comes at a time
when the government’s Industrial Strategy
has reiterated the productivity and regional
challenges facing the UK economy, and the
outcome of the Patient Capital Review has
identiÿed the need for additional action to
ÿnance growth in innovative ÿrms.
Improving the growth and productivity of smaller
businesses is central to improving the performance
of the economy as a whole. This makes it even
more important that ÿnance markets are e¤ective
in supplying funding to smaller businesses when it
is needed, and that smaller businesses across the
UK have the ability and conÿdence to attain ÿnance
appropriate to them.
This report provides a unique, in depth picture of
the smaller business ÿnance market. It is intended
not only to inform the development of the British
Business Bank’s own strategy, but also to inform
wider developments in both the market and
government policy.
The report structure has been reÿned this year, to
highlight the major cross cutting themes in Part A,
with Part B providing a more detailed review of the
small business sector and developments in speciÿc
ÿnance product markets. Five key themes emerge
from our analysis.
EQUITY AND ALTERNATIVE FINANCE DEMONSTRATED
STRONG GROWTH IN 2017, WITH BANK LENDING
VOLUMES RELATIVELY FLAT
Despite the modest macroeconomic environment,
small business ÿnance markets have continued to
provide signiÿcant volumes of ÿnance to smaller
businesses. Aggregate ows of ÿnance saw
signiÿcant double digit increases for many products,
however bank lending was relatively at, resulting
in an increasingly diversiÿed ÿnance market for
smaller businesses.
Most notably, values of external equity ÿnance
received by smaller businesses rose rapidly,
increasing by 79% in the ÿrst 3 quarters of 2017.
Although deal sizes have increased across all equity
stages, this was partly due to a small number of
very large deals. The 10 largest equity deals alone
account for over £1.6bn of the £4.5bn invested in
the ÿrst 3 quarters of 2017. The number of deals
however were also up by 12% compared to weaker
deal activity seen in 2016. This development
is particularly welcome as equity ÿnance is an
important input to enabling many businesses to
deliver their growth potential.
Peer-to-peer business lending also showed
continued rapid growth, rising by just over 50% in
2017. Such lending is challenging traditional bank-
based models of lending, although it remains around
only 3% of gross bank lending ows. Finally, asset
ÿnance has continued the consistent low double-digit
growth which has been apparent for several years.






























































































































































7
6
BRITISH BUSINESS BANK
This growth demonstrates increased diversity in
small business ÿnance markets. As previous British
Business Bank research on diverse ÿnance markets
has argued, this helps small businesses get the
ÿnance best suited to their needs. The Bank’s
support for alternative lenders continued to grow
in 2017 with the Investment Programme investing
through challenger banks, debt funds, asset ÿnance
providers and marketplace lenders. 2018 has already
seen two ENABLE Funding transactions with asset
ÿnance providers.
CONTINUED EXCELLENT UK PERFORMANCE IN
GENERATING START¬UPS, IMPROVING IN SCALE¬UPS
The UK economy has a strong track record
in generating start-ups. The latest available
international comparisons show the UK leading
the G7 in terms of birth rates of new businesses.
Although death rates have edged up slightly the
UK small business population has continued to
increase, rising to an estimated 5.7m businesses
by the start of 2017.
International comparison of the share of high growth
enterprises, who are a key driver of innovation and
employment, shows a slight increase in the UK,
whereas it has fallen in countries such as Germany,
Denmark and Sweden. There remains more to do,
but it is encouraging to see some signs of better
scale-up performance in the UK.
The incidence of high growth enterprises in the
UK has been relatively stable since the 1990s.
Yet research by the Enterprise Research Centre
suggests that a focus on high growth episodes
experienced by enterprises over their life cycle is
helpful in predicting future growth potential. Very
few ÿrms have prolonged high growth, but those
that have a high growth episode are more likely to
do so again at a later stage.
Because of their positive impact on the economy,
the British Business Bank has increased its support
for smaller businesses with high growth potential,
by increasing funds allocated to equity schemes and
debt products that are suited to those ÿrms. The
Bank has also played a role in taking forward the
recommendations of the Scale-Up Task Force.
THE PATIENT CAPITAL REVIEW IDENTIFIED A NEED
FOR MORE EQUITY INVESTMENT AT ALL STAGES
The evidence included in the Patient Capital Review
consultation drew on British Business Bank analysis
from our 2017 Equity Tracker Report published
in August 2017. Despite recent improvements in
the availability of equity ÿnance in the UK, the UK
external equity ÿnance to GDP ratio is lower than
some of our international competitors. The Patient
Capital Review focused on the availability of late
stage VC, where funding provision in UK markets
was noticeably below that in the US and therefore
potentially hampered UK businesses’ growth potential.
2016 and 2017 have also seen relatively high
aggregate amounts of fund raising, but an ongoing
decline in the number of VC funds closing. This
demonstrates the continued diłculty emerging
fund managers have in raising new funds which
our Enterprise Capital Fund (ECF) programme seeks
to address.
As a result of this and other analysis, the
Patient Capital Review included a number of
recommendations for British Business Bank equity
activity to broaden and deepen markets, including:
• Establishing a new £2.5bn investment fund
incubated in the British Business Bank with the
intention to œoat or sell once it has established
a su¢cient track record
• Investing in a series of private sector fund of
funds of scale, with the British Business Bank
seeding the ÿrst wave of investment with up
to £500m
• Continuing to back ÿrst-time and emerging fund
managers through the ECF, supporting at least
£1.5bn of new investment.
NEW 2017 DATA HIGHLIGHTS REGIONAL GAPS IN
SOME PRODUCTS
Previous Small Business Finance Market reports
have highlighted that equity investment tends to
be clustered in certain cities, particularly but not
exclusively London, where innovative companies,
skilled labour and equity investors come together.
The evidence from 2017 showed that this continued
to be the case, with the volume and value of equity
received by London based businesses exceeding
that for the rest of the country combined. As equity is
often an important ingredient for growth, increasing
equity activity in regions outside London and the South
East could help close disparities in regional growth.
The joint British Business Bank – UK Business Angels
Association survey of angel activity, published in
December 2017, conÿrmed that angel investment is
similarly concentrated in London and the South East.
The British Business Bank is taking a number of
steps to address these imbalances. It is continuing
to implement the geographically focused funds in
the Northern Powerhouse and Midlands Engine
regions. In addition, and as announced at the
Autumn Budget 2017, the British Business Bank is
developing a commercial investment programme
to support the development of clusters of business
angels outside London.
The Bank will also be developing a network of
British Business Bank regional managers to be in
place by autumn 2018 to ensure businesses across
the UK know how to access sources of investment.
That will be complemented by a new digital hub
developed by the Bank, o¤ering authoritative,
impartial information around access to ÿnance for
ÿrms with scale-up ambitions. This is due to launch
in Spring 2018.
SMALL BUSINESS FINANCE MARKETS 2017/18
RECORD LOW DEMAND FOR TRADITIONAL BANK
LOANS IN 2017
Data on loan application rates has showed a
continuing decline in the share of SMEs seeking
new loans to 1.7% of smaller businesses, the lowest
ÿgure since the SME Finance Monitor began in 2011.
In addition, there has been a decline in SMEs
conÿdence that they will get a loan when they
apply, down to 43% in the 3 months to November
2017, compared to 58% in the previous 3 months
which mirrors the broad decline in smaller business
conÿdence levels. This contrasts with loan approval
rates which remain quite high.
There is also evidence that the attitudes against
borrowing are becoming more entrenched across
SMEs of all size bands, with around 70% willing to
accept a slower growth rate rather than borrowing to
grow faster. Combined with the increase in positive
cash balances held by SMEs, this suggests a broader
reticence to invest to grow.
This highlights that, particularly for smaller
businesses with growth potential, there would be
beneÿt in improving the information available to
them about their ÿnance options.


































































































































































































































9
SMALL BUSINESS FINANCE MARKETS 2017/18
8
BRITISH BUSINESS BANK
• Examples, which were published in our 2017
Equity Tracker, include detailed analysis of
venture capital fundraising and portfolio
company exits
• The British Business Bank and UK Business
Angel Association commissioned a new survey
of Business angel investors to give a more up to
date understanding of the angel landscape in
the UK
• We draw on externally commissioned evaluations
of British Business Bank products, most notably,
our recent evaluation of the Enterprise
Finance Guarantee.
This report also references a wide range of evidence
drawn from government, market and academic
research. This year we made greater e¤ort to pull
together the international evidence in the report,
so that UK small business ÿnance markets are
compared to the best around the world.
STRUCTURE OF THE REPORT
The report begins with an overall assessment of
the aggregate ows of ÿnance, macro-economic
developments and the implications for small
business ÿnance needs.
Part A provides a thematic overview looking in
turn at the drivers of demand, regional ÿnance
variations, the evidence on patient capital and
international comparisons of small business
ÿnance markets.
Part B examines in more detail developments in the
small business and high growth ÿrm populations.
It then considers the market for di¤erent types
of debt and equity ÿnance most widely used by
smaller businesses, identifying where further
improvements can be made.
This is the fourth annual British Business Bank
report on Small Business Finance Markets,
setting out the latest evidence on the ways
in which ÿnance markets support smaller
business and help them contribute to improving
productivity and growth in the UK economy.
Our understanding of smaller business ÿnance
markets, both in terms of demand for ÿnance and
the ÿnance providers’ supply of ÿnance, is essential
to shaping our business plan and the design of
our programmes and products. Macro-economic
developments in 2017 have reinforced the need to
ensure that small business have the ÿnance they need
to make a strong contribution to economic growth.
NEW EVIDENCE AND ANALYSIS
During 2017, the British Business Bank has
developed new evidence and analysis to deepen
our understanding of smaller business ÿnance
markets. In particular:
• Our Small Business Finance Survey has been
run again to give up to date insight into smaller
businesses, awareness of the ÿnance options
available to them and how they go about
obtaining ÿnance
• We created a framework to give a better
understanding of the potential impact of
diversity in the supply of ÿnance for small
businesses1
• A new segmentation analysis has been created
to give more insight into smaller businesses who
use, or are open to using, external ÿnance
• We carried out more detailed analysis of the
UK equity markets to inform the Patient
Capital Review
INTRODUCTION
AGGREGATE FLOW AND STOCK OF FINANCE
TO SMALLER BUSINESSES
• Net œow of bank lending products remained positive
This section brings together the latest data from a range
in 2017 but weaker than the previous 2 years
of sources on the volume and value of various types
of external ÿnance provided to smaller businesses.
Consistent and comprehensive data outlining the value
• Equity ÿnance rebounded in 2017, whilst asset ÿnance
of the aggregate stocks and ows of all forms of external
and marketplace lending continue to grow, increasing
ÿnance is not readily available. However, the summary
the diversity in smaller business ÿnance markets
table below provides a reasonable snapshot.
While ows of di¤erent types of ÿnance are not directly
• Small business conÿdence and demand for ÿnance
comparable, the data shows that bank lending remains
are declining along with the number of smaller
the single largest form of external ÿnance for smaller
businesses hoping to grow
businesses.
FIGURE 1
ESTIMATES OF THE FLOW & STOCK OF EXTERNAL FINANCE FOR UK SMEs ¯£ BILLION° ¯a°
2012
2013
2014
2015
2016 2017
Bank lending stock
Source: Bank of England
Outstanding Amount (b)
176
166
167
164
166
165
to end Dec 17
Bank lending œows
Source: Bank of England
Net ows (c)
Gross ows (d)
-6
38
-2
43
-2
53
2
58
3
59
1
57
to end Dec 17
to end Dec 17
Other gross ows of SME ÿnance
Private external equity investments
Source Beauhurst (e)
1.49
1.53
2.31
3.58
3.42
4.47
to end Sep 17
Number of reported deals
706
972
1309
1408
1148 984
to end Sep 17
Asset ÿnance œows
Source: FLA (f)
12.2
12.9
14.4
15.9
16.7
18.6
to end Dec 17
Peer-to-peer business lending œows
Source: AltFi Data (g)
0.06
0.20
0.41
0.73
1.18
1.78
to end Dec 17
(a) The information contained in this table should be viewed as indicative
as data and deÿnitions 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. All numbers are
in billions, except number of reported equity deals, and have been
rounded appropriately.
(b) Movements in amounts outstanding can reect breaks in data series
as well as underlying ows.
(c) Net ows does not always reconcile with change in stock due to
di¤erences in statistical reporting. The reported stock can include
other adjustments made by banks but not detailed when reported,
whereas ows data does not include these adjustments.
(d ) Data exclude overdrafts and covers loans in both sterling and foreign
currency, expressed in sterling. The total may not equal the sum of its
components due to rounding.
(e) Beauhurst is a market data provider that records visible equity deals
including crowdfunding deals.
(f) The Finance & Leasing Association (FLA) whose members make
up 90-95% of the market. Data obtained from FLA Asset Finance
Conÿdence Survey. SME asset ÿnance is assumed to represent 60%
of total asset ÿnance in 2011.
(g) Figures do not represent the entire market. Data obtained from
AltFi Data.































































































































10 BRITISH BUSINESS BANK
NET FLOW OF BANK LENDING PRODUCTS
REMAINS POSITIVE
The annual net ows of bank loans (new loans,
excluding overdrafts) to smaller businesses has
continued to grow, albeit at a slower pace. However,
following 12 consecutive quarters of positive net
lending, Q4 in 2017 was slightly negative. In 2017
net lending stood at £0.7bn, well down on the £3bn
for the equivalent period in 2016. Quarterly gross
bank lending to smaller businesses, which reached
a peak of £15.4bn in the ÿrst quarter of 2016,
averaged £14.3bn in 2017. The Bank of England
(BoE) Credit Conditions Review noted the availability
of credit to businesses was little changed in 2017.2
The stock of bank loans and overdrafts was
estimated at £165bn at the end of 2017, broadly
unchanged from 2016.
EQUITY FINANCE HAS BOUNCED BACK FROM A
WEAKER 2016 WHILST ASSET FINANCE, INVOICE
& ASSET¬BASED LENDING AND MARKETPLACE
LENDING CONTINUE TO GROW
Equity data shows there has been a resurgence in
equity markets in 2017 following a weaker 2016.
The value of new equity deals with known amounts
has reached £4.5bn in 2017 by Q3, up from the
£3.4bn ÿgure for the entire of 2016.
Data from the Finance and Leasing Association
suggests that new asset ÿnance volumes with
smaller businesses was over £18.6bn by the end
of 2017, an increase of 12% on 2016.
Total invoice & asset-based lending advances to
smaller businesses continue to rise and across all
sizes of smaller businesses. The value and volume
of ÿnancing for smaller businesses from debt funds
is not readily available. However, anecdotal evidence
suggests debt funds continue to have an important
role as a source of ÿnance for smaller businesses,
especially for businesses that are scaling-up.
Gross ows of lending to businesses via peer-to-peer
platforms continue to grow reaching £1.78bn in 2017,
an increase of 51%. Equity raised by businesses
through equity-based crowdfunding continues to
fall but remains an important source of business
ÿnance and, along with the other non-bank sources
of ÿnance, an important source of diversity within
smaller business ÿnance markets. Part B provides
a detailed discussion of the trends in volumes for
di¤erent types of ÿnance.
SMALL BUSINESS CONFIDENCE AND DEMAND
FOR FINANCE ARE DECLINING, WITH THE
NUMBER OF SMALLER BUSINESSES HOPING
TO GROW DECREASING
Demand for external ÿnance by UK smaller businesses
has continued to decline. Our analysis of the SME
Finance Monitor shows new debt application rates
have fallen every year since 2012 (4% for overdrafts
and 2.9% for bank loans) and H1 2017 has continued
this trend with only 1.7% of smaller businesses
applying, a record low.3,4 This has been matched by
a build-up of cash reserves over the same period. In
Q2 2017, 26% of SMEs reported holding more than
£10,000 in credit balances, an increase from 16% in
2012 and 21% the same time last year.
The Federation of Small Business (FSB) Voice
of Small Business reported decreasing business
conÿdence over 2017, with conÿdence declining
in each quarter.5 The FSB Small Business Index
fell from +1.1 in Q3 2017 to -2.5 in Q4. This is only
the second negative index reading in 5 years with
continuing cost pressures and wider economic
SMALL BUSINESS FINANCE MARKETS 2017/18 11
uncertainty the key drivers. The share of businesses
expecting to downsize, close or hand on the business
over the coming 12 months stood at 14.6% in Q4.
This is up from 9.4% a year ago, and the largest
share since data collection began in 2012. The ICAEW
conÿdence index has also been lower during 2017
and has been in negative territory for the last 2
quarters of the year.
The domestic economy remained a major barrier
to growth aspirations in Q4 2017, with 55% of
small businesses reporting it as an obstacle to
achieving growth aspirations. This is slightly down
from 56.7% a year ago. The British Business Bank
Business Finance Survey for 2017 shows a small
decrease in the proportion of smaller businesses
expecting to grow in the next 12 months, from 37%
of SMEs in 2016 to 35% of SMEs this year. Both
these numbers are well below the 2015 number
of 56%. This is lower than the FSB Voice of Small
Business where just under half of small businesses
reported an aspiration to grow over the next year in
Q4 2017.














































































































































































12 BRITISH BUSINESS BANK
MACRO-ECONOMIC DEVELOPMENTS
• The UK economy has continued to grow over 2017,
albeit at a slower pace than other advanced economies
• Productivity and business investment growth both
revised down
• SME Conÿdence surveys suggest the picture is
unlikely to change in the medium-term
• A majority of SMEs expect no impact from leaving
the EU though fewer than last year think they’ll
grow more
• Credit conditions have remained accommodative
overall
THE UK ECONOMY HAS CONTINUED TO GROW OVER
2017, ALBEIT AT A SLOWER PACE THAN OTHER
ADVANCED ECONOMIES
The UK economy has continued to grow over 2017
whilst employment rates have remained high and
unemployment is at its lowest rate since the 1970s.
In 2017, the ONS estimated the economy expanded by
about 1.8% compared with the previous year, higher than
the OBR’s Autumn forecast of 1.5%, but down from a rate
of 1.9% in 2016, and the slowest pace of annual growth
since 2012. The slowdown in UK GDP growth contrasts
with a pick-up in other advanced economies. In the euro
area, US, Canada and Japan, quarterly growth has been
stronger than in the second half of 2016 and stronger
than in the UK. Sterling’s fall has seen ination pick up
more rapidly in the UK than in the other major economies,
contributing to weaker real growth.
The fall in the pound that followed the EU referendum
has pushed up consumer price ination and squeezed
households’ real incomes and spending whilst public
spending cuts and political and Brexit-related uncertainties
have also weighed on the economy. The OBR has now
downgraded its growth forecasts for the medium-term,
saying the UK economy would grow by just 1.4% in 2018,
1.3% in 2019 and 2020, and 1.5% in 2021. The growth
ÿgure is now in line with the Bank of England’s assessment.
Bank Rate increased by 0.25% in November 2017 to 0.5%,
the ÿrst increase in a decade. Interest rates are expected
to rise slowly.
PRODUCTIVITY AND BUSINESS INVESTMENT GROWTH
BOTH REVISED DOWN
Leading much of the downward revision is potential
productivity growth. The OBR now expects productivity
growth to fall from 1.8% to 1% in 2020. Productivity has
stalled since the ÿnancial crisis in 2008, with output per
hour rising just 0.2% a year in the last decade, compared
to an average of 2.1% a year over the preceding 35 years.
This decision to revise down trend or potential productivity
growth is a major reason the OBR’s growth forecast is
now more pessimistic than many external forecasters.
Growth is still expected in business investment, a crucial
driver of long-term growth. The OBR now expects business
investment to remain stable between 2.3% and 2.4%
between 2018 and 2022. However, conÿdence surveys
suggest that the anticipation of Brexit and related
uncertainties are weighing on investment. For instance,
in a recent survey on investment intentions by the Bank
of England’s Agents, economic uncertainty, expected
changes to future UK trading arrangements and other
Brexit factors were the most commonly cited factors
weighing on investment plans.
SME CONFIDENCE SURVEYS SUGGEST THE PICTURE IS
UNLIKELY TO CHANGE IN THE MEDIUM¬TERM
During 2017, most SME conÿdence surveys were down.
The Markit UK Business Outlook recorded its lowest
business conÿdence since October 2011 during the
summer and several other surveys recorded multi-year
lows. Alongside political uncertainty, businesses faced
the twin pressures of a weakening domestic economy,
as well as rising costs of doing business. The former was
driven by low consumer demand whilst, with regards the
latter, purchase price ination hit record highs at the start
of the 2017 as the devaluation of Sterling fed through.
Headline ÿgures did hide a divergence between the
manufacturing and service sectors however. Whilst the
service sector posted multi-year low conÿdence ÿgures
manufacturing ÿrms often remained more upbeat about
their growth prospects as they sought to take advantage
of the devaluation of Sterling and the improving world
economic picture and surveys such as the Federation
of Small Business (FSB) Voice of Small Business Index
reported increased values of exports throughout the
year. This is backed up by ołcial ÿgures which show
manufacturing output is at its highest level since
February 2008.
SMALL BUSINESS FINANCE MARKETS 2017/18 13
A MAJORITY OF SMEs EXPECT NO IMPACT FROM LEAVING
THE EU THOUGH FEWER THAN LAST YEAR THINK
THEY’LL GROW MORE
As with the results from 2016, according to our 2017
Business Finance Survey, the majority of SMEs expect no
impact from leaving the EU. This is perhaps unsurprising
given the limited number of UK SMEs that import or
export. However, the number of SMEs who expect to
grow as a result of the UK leaving the EU has halved this
year and now stands at 5% across those that do, and do
not, employ sta¤.
Unsurprisingly given these ÿndings, on balance, a greater
proportion of employers are looking to reduce investment
and sta¤ as a result of the UK leaving the EU. In a similar
picture to 2016, only 4% of respondents plan to make
changes to their investment plans and 3% plan to make
changes to their recruitment plans as a result of Brexit.
Of these, 54% said they were looking to invest a smaller
amount and 51% expected to hire fewer sta¤ than would
have otherwise have been the case. In contrast only 19%
expected to invest a greater amount and 10% expected
to hire more sta¤ than would have been the case.
DESPITE THE MODEST ECONOMIC PERFORMANCE
IN 2017 CREDIT CONDITIONS HAVE REMAINED
ACCOMMODATIVE OVERALL
Throughout 2017, availability of credit to the corporate
sector was reported to have been unchanged and broadly
accommodative. However, unlike FSB’s survey, which
noted improved credit conditions, a Bank of England
Credit Conditions Survey and Agents Report stated some
smaller companies reported greater diłculty in gaining
access to banks’ relationship managers in recent months.






























































































PART A
THEMES
14 BRITISH BUSINESS BANK
1.1
DEMAND FOR FINANCE
• Information failures exist on the demand side
• SMEs prefer to avoid external ÿnance…
1.1
DEMAND FOR FINANCE
1.2
REGIONAL ACCESS TO FINANCE
1.3
PATIENT CAPITAL FOR SCALE-UPS
1.4
INTERNATIONAL COMPARISONS OF
SMALL BUSINESS FINANCE MARKETS
• …and SMEs prefer to self-fund their growth where
possible
• Changing the narrative on control may be required to
a©ect change
BRITISH BUSINESS BANK ANALYSIS ACKNOWLEDGES IT
IS IMPORTANT TO CONSIDER THAT:
• SMEs are heterogeneous, with di©erent ambitions
and aspirations to grow
• SMEs who use ÿnance, or are open to using ÿnance,
fall into 4 distinct segments
• SME segmentation insights enable policy responses
to be targeted and more e©ective
SMALL BUSINESS FINANCE MARKETS 2017/18 15
FACTORS LIMITING DEMAND
Smaller businesses are a vital part of the UK economy and
a dynamic, growing SME sector is an essential element of
future economic growth. SMEs play a key role in raising
low productivity in the UK by spurring innovation,
adopting new practices and encouraging ‘productive
churn’ through competition.
The ability of SMEs to access ÿnance is critical for funding
business investment which in turn allows businesses
to start-up and achieve their full growth potential. An
inełcient market in SME ÿnance with fewer businesses
getting the right ÿnance can constrain business
development and reduce business survival rates.
Lower than expected volumes of SME ÿnance transactions
in the UK can reect market failures in the supply-side,
demand-side, or both sides of small business ÿnance
markets. As the supply of SME ÿnance has improved
following the global ÿnancial crisis, the British Business
Bank has turned its attention to examining in greater
detail demand-related market conditions in UK SME
ÿnance, and considering the best policy interventions
to address these.
Demand in the UK for SME ÿnance, in the form of new debt
applications for bank loans and overdrafts, has been falling
in the 5 years since 2012. For example, the percent age of
SMEs applying for a new loan has fallen from 2.9% in 2012
to only 1.7% in H1 2017.6 There is evidence that this decline
is the result of on-going demand-side market failures.
INFORMATION FAILURES EXIST ON THE DEMAND SIDE
There are information market failures which a¤ect the
demand for SME ÿnance. For example, if key business
decision makers hold imperfect or inaccurate information
on the types, costs, beneÿts, and their likelihood of
securing external ÿnance, then demand may be suppressed.
















































































































































































16 BRITISH BUSINESS BANK
FIG A.1
AWARENESS OF PRODUCTS AND SPECIFIC PROVIDERS
Source: British Business Bank 2017 Business Finance Survey - Ipsos MORI
Base = all SMEs (n=2,070 in 2017)
Credit cards
Leasing/Hire purchase
Government/LA grants
Invoice ÿnance/
factoring
Crowd funding
Trade ÿnance
Venture capital
P2P lending
Business angels
Mezzanine ÿnance
0
20
40
60
80
100
Per cent
Awareness of providers
Awareness of ÿnance type
FIG A.2
AWARENESS OF TYPES OF FINANCE BY REGION
Source: British Business Bank 2017 Business Finance Survey – Ipsos MORI
Base = all SMEs (n=2,070 in 2017)
0
10 20 30 40 50 60 70 80 90 100
Credit cards
Leasing/Hire purchase
Government/LA grants
Invoice ÿnance/
factoring
Crowdfunding
Trade ÿnance
Venture Capital
P2P lending
Business angels
Mezzanine ÿnance
Per cent
North
Midlands
South (excl. London)
London
Anecdotal evidence suggests that some UK entrepreneurs
do not fully consider the di¤erent options available to
them to support their long-term growth. This reduces the
ełciency by which capital is allocated to growing ÿrms,
meaning that high growth potential ÿrms sometimes
struggle to obtain the right ÿnance that they need to
grow to scale.
This is corroborated by survey data which has consistently
shown that most UK SMEs are not aware of ÿnancial
products beyond standard term bank loans, overdrafts
and credit cards. And, even where they are aware of a
product, often they may not practically know a trusted
provider of that product to contact (ÿgure A.1).
Furthermore, there are regional variations to awareness.
Awareness of alternative ÿnancial products is generally
lower outside of London and the South East (ÿgure A.2).
This may reect a lack of availability of such products, or
could be one of the contributing factors for the lack of
critical mass to support product availability, or both.
Product (and provider) awareness is necessary for a
functioning market, but not sułcient. An SME should also
understand the costs and beneÿts of a ÿnancial product
before being willing to use it. A survey carried out by the
Wesleyan Bank suggests that SMEs often don’t have
a good enough understanding of the ÿnancial options
available to them to make sound borrowing decisions.7
The 2016 Wesleyan Bank SME Attitudes to Finance survey
highlights only 24% of SMEs would feel comfortable to
borrow from an alternative ÿnance provider in comparison
to 63% who would feel comfortable borrowing from a
bank. Even then, only 45% and 37% stated that they
had a full understanding of overdrafts and bank loans
respectively. Furthermore, conÿdence amongst SMEs
planning to apply for bank ÿnance has declined towards
the end of 2017. In 2016, 55% of SMEs planning to apply
for bank ÿnance were conÿdent of success, with conÿdence
increasing in the latter half of the year. During 2017
conÿdence has been more volatile, but declined to 43%
in the 3 months ending November 2017.8
Even amongst those SMEs who are conÿdent that they
understand which ÿnancial product is best suited to
their needs, there may be imperfect information around
their self-assessed probability of successfully applying
for that product. Surveys show that smaller business
owners systematically view getting ÿnance as diłcult
and over-estimate their probability of being rejected.
Such perception gaps may not reect reality at present,
with around 80% of bank loan and overdraft applications
being approved (the rate for ÿrst time applications is lower,
at around 50%).9 The 2016 British Business Bank Business
Finance Survey highlighted 56% of SMEs reporting a
perception that obtaining external ÿnance is ‘diłcult’.
Data shows that a small but signiÿcant proportion of SMEs
who say that they require ÿnance remain discouraged
from applying for ÿnance because they believe they will
be rejected. This translates into 1% of all SMEs.10
Taking external advice when seeking external ÿnance,
given the lack of awareness and understanding of the
products available, would appear to be one solution to
addressing these demand-side market failures. However,
British Business Bank survey data shows that most SMEs
do not seek advice when applying for ÿnance (ÿgure A.3).
SMEs PREFER TO AVOID EXTERNAL FINANCE…
Lack of awareness and understanding of ÿnancial
products can also reect a more fundamental apathy
and perceived absence of relevance to business owners.
There is, after all, no reason for an entrepreneur to take
the time to educate themselves on forms of ÿnance if
they have no intention of ever requiring or applying for
external ÿnance. Not least, doing so is time consuming
and any ultimate ÿrst-time application is fraught with the
real possibility of rejection. Also, there is a proportion of
smaller businesses who have a perception that obtaining
ÿnance takes a lot of e¤ort. In Q2 2017, 7% of future
would-be seekers of ÿnance cited the hassle of borrowing
as the reason for not planning to seek ÿnance, despite
having a need to do so.
Indeed, we ÿnd that a perceived lack of relevance is
the case for a large portion of the UK SME population.
For some business owners, this is driven by a general
aversion to external ÿnance options even if that means
sacriÿcing growth opportunities. For other business
owners, this is driven by access to other more attractive
ways of funding their growth plans.
There is signiÿcant reported aversion to external ÿnance
amongst UK SMEs. 42% of surveyed UK SMEs do not
currently use ÿnance and are unwilling to do so (ÿgure
A.4). This aversion is concentrated amongst SMEs with
no employees, but even amongst SMEs with 50 to 249
employees, 21% neither use nor express a desire to use
external ÿnance in the future.
For many UK SMEs, their ultimate aspiration is to be debt
free. In 2016, 68% of smaller businesses agreed that “their
aim was to pay down debt and remain free if possible”.11
SMALL BUSINESS FINANCE MARKETS 2017/18 17
FIG A.3
WHAT WAS THE FIRST THING YOU DID WHEN YOU REALISED
YOU HAD A FINANCING NEED?
Source: British Business Bank 2017 Business Finance Survey – Ipsos MORI
Base = all SMEs that sought ÿnance in the last 3 years (n=932)
Went directly to main bank
Spoke to supplier/dealer/manufacturer
Researched ÿnance types and products on internet
Used a credit card/overdraft/existing facilities
Went to ÿnance provider other than bank
Sought advice from other businesses/friends
Spoke to ÿnance adviser
Spoke to board/directors/seniors
Spoke to accountant
Looked into ÿnance options
Examined expenses/cash ow/company accounts
Looked into ÿnancing myself internally
Went directly to another bank
0
5 10 15 20 25 30 35 40
Per cent
FIG A.4
USE OF EXTERNAL FINANCE AND WILLINGNESS
TO USE IN THE FUTURE
Source: BDRC Continental, SME Finance Monitor Q2 2017
Total
0
1-9
10-49 50-249
emps emps
emps
emps
Use external ÿnance
and willing to use
in future
19%
16%
27%
35%
39%
Use external ÿnance
but not willing to use
in future
20%
19%
21%
26%
28%
Do not use it
but willing to
19%
19%
19%
15%
13%
Do not use it
and not willing to
42% 45%
34%
26%
21%

























































































































































































































18 BRITISH BUSINESS BANK
FIG A.5
PROPORTION OF SMEs HAPPY TO USE EXTERNAL
FINANCE FOR GROWTH AND DEVELOPMENT
Source: BDRC Continental, SME Finance Monitor Q2 2017
Total
0
1-9
10-49 50-249
emps
emps
emps
emps
Strongly agree
7%
6%
9%
10%
13%
Agree
31%
29%
36%
40%
39%
Neither/nor
23%
23%
22%
25%
29%
Disagree
28%
29%
24%
20%
15%
Strongly disagree
11%
12%
9%
6%
3%
Total “Agree”
38%
35%
46%
49%
52%
FIG A.6
CREDIT BALANCES HELD OVER TIME FOR ALL SMEs
Source: BDRC Continental, SME Finance Monitor Q2 2017
2012 2013 2014 2015 2016 H1 2017
None
4%
4%
5%
3%
3%
4%
Less than
£5,000
66% 64% 58% 55% 57%
52%
£5,000 to
£10,000
14%
15%
17%
18%
18%
19%
£10,000 to
£50,000
11%
12%
14%
17%
15%
18%
More than
£50,000
5%
4%
6%
7%
6%
8%
Average
balance held
£25k £24k £31k £39k £30k
£40k
That said, ÿnance aversion amongst UK SMEs does not
dominate in actual practice with many SMEs who express
a desire to avoid ÿnance still using it. 40% of small
businesses currently used some form of external ÿnance
in Q2 2017, increasing by size of SME. 76% of medium
sized businesses (50-249 employees) made use of it in
comparison to 52% of micro businesses (1-9 employees).12
Fundamentally, ÿnance is a means to enable growth
plans (through for example purchasing assets) or to
bridge cash ow shortfalls. Overall, 66% of SMEs who
applied for external ÿnance over the last 3 years did so to
acquire working capital or cash ow, and 41% applied to
invest in their business. Medium-sized SMEs (50 to 249
employees) were more likely to apply for external ÿnance
for investment purposes than small (10 to 49 employees)
and micro businesses (1 to 9 employees) and were less
likely to need ÿnance for working capital.13
…AND SMEs PREFER TO SELF¬FUND THEIR GROWTH
WHERE POSSIBLE
Only 38% of UK SMEs agree with the statement “as a
business we are happy to use external ÿnance to help the
business grow and develop” (ÿgure A.5).14 This suggests
that the remaining 62% of businesses will turn to other
alternatives ÿrst, in line with pecking order theory, and
fund growth internally before using external debt and then
external equity (see section 2.3, Use of external ÿnance).
Almost all SMEs hold some credit balances, but the number
holding larger credit balances has increased over time.
This has enabled more business owners to self-fund,
in line with their preferences.
SMEs holding balances of £10,000 or more increased
from 16% to 26% between 2012 and H1 2017 (ÿgure
A.6). This increase in credit balances is also reected in
the average balance held by SMEs which increased from
£25,000 to £39,000 between 2012 and 2015. In 2016,
it was lower at £30,000 but then increased again to
£40,000 during H1 2017. SMEs of all sizes have seen an
increase in credit balances of £10,000 and above during
this period. Generally, the larger the SME the more likely
it is to hold such sums.
As one might expect, the SME Finance Monitor revealed
that holding credit balances of £10,000 and above from
Q3 2015 reduced the need for 8 in 10 SMEs to use external
ÿnance. Furthermore, 81% of smaller businesses in Q2
2017 agreed that “our current plans for the business are
based entirely on what we can a¤ord to fund ourselves”.
However, we might also expect that given a choice between
tapping external ÿnancing to achieve proÿtable growth
and forgoing growth by avoiding external ÿnancing,
then business owners would choose ÿnance. This is not
necessarily the case. 70% of SMEs report that they are
prepared to accept slower growth if it could then be self-
funded. This holds less true for medium sized businesses
(50-249 employees) where only 55% were willing to
accept slower growth (ÿgure A.7).
CHANGING THE NARRATIVE ON CONTROL MAY BE
REQUIRED TO AFFECT CHANGE
The evidence, whilst not conclusive, suggests that there
is a demand-driven gap between optimum levels of
investment in a fully functioning market and the levels
found today. Root causes for this gap can be found in the
preferences and practices of UK business owners.
Fear of external ownership is real in the case of external
equity: 55% of SMEs state that they would be worried about
loss of control and 45% did not want to give a share away.15
Other academic research shows that founders of ÿrms
appear to be more motivated over the long-term by the
autonomy of being an entrepreneur and being in control of
their ÿrm rather than through ÿnancial incentives.16 Although
debt poses less obvious risk of loss of control, it can still
be viewed as reducing the autonomy of a business owner.
An alternative way of viewing the trade-o¤ between
business owner control and the pursuit of growth
opportunities may be required to address these demand-
side market failures. Entrepreneurs must be convinced
that it is preferable to own a smaller share of a larger,
more valuable entity with the additional ÿnance, support
and expertise this could provide, than it is to remain in
sole control of a smaller, less valuable business.
SMALL BUSINESS FINANCE MARKETS 2017/18 19
FIG A.7
WILL ACCEPT A SLOWER GROWTH RATE RATHER
THAN BORROWING TO GROW FASTER
Source: BDRC Continental SME Finance Monitor, Q2 2017
50-249
employees
10-49
employees
1-9
employees
0
employees
All
0
10
20
30
40
50
60
70
80
90 100
Per cent
Strongly agree
Agree
Neither
Disagree
Strongly disagree





































































































































































20 BRITISH BUSINESS BANK
SME ATTITUDINAL AND NEEDS
BASED SEGMENTATION
SMEs ARE HETEROGENEOUS, WITH DIFFERENT
AMBITIONS AND ASPIRATIONS TO GROW
SMEs WHO USE FINANCE, OR ARE OPEN TO USING
FINANCE, FALL INTO 4 DISTINCT SEGMENTS
The British Business Bank worked with existing survey
data of UK SMEs and commissioned a cluster-based
analytical segmentation of the population based on SME
attitudes and needs towards ÿnance (see Use of external
‘CONTENTED’
The largest of the 4 segments, the ‘Contented’ make up 32%
of SMEs and are broadly unworried and undemanding
(ÿgure A.9). They self-report being ÿnancially conÿdent
but objectively have lower levels of ÿnancial qualiÿcation
and lower rates of awareness/understanding of ÿnancial
SMALL BUSINESS FINANCE MARKETS 2017/18 21
FIG A.9
BRITISH BUSINESS BANK SME SEGMENTS,
PERCENTAGE OF BUSINESSES
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset
ending Q2 2017
Quicksilvers
Permanent non-borrowers
Contented
9
Fighters
47
32
7
Savvy
Entrepreneurs
6
ÿnance section 2.3 for more detail on our technical
approach). Notably, this segmentation did not consider
need for any single type of ÿnance, but rather overall
need for and use of di¤erent types of ÿnance and non-
ÿnance support. It also overlaid an SME’s openness to
external information about ÿnance and how to secure it.
This attitudinally based approach suggests that UK
SMEs can be usefully divided into 4 distinct groups
that currently use external ÿnance or are open towards
using ÿnance, in addition to a large group which neither
currently uses nor intends to use any form of ÿnance.
products. Relative to other groups, the Contented are
least likely to be innovative and internationally oriented
businesses and have substantially lower growth ambitions.
Contented have the lowest proportion of SMEs (16%)
that have plans to grow by more than 20% over the next
year (ÿgure A.10). Notably, this group is also among the
least happy to use external ÿnance to grow and is least
interested in new external information (ÿgure A.11). This
may reect the reduced relevance of ÿnance given low
growth ambitions.
‘QUICKSILVERS’
It is at this point where speaking of smaller business owners
as a single entity becomes less useful for generating
insights. What may be true is not to speak of average
ambition levels found across a heterogenous population
of 5.7m smaller businesses in the UK, but rather the
percentage of that population which does have high
ambition and a growth mindset.
The British Business Bank has undertaken SME
segmentation analysis so that interventions can be
targeted to the highest potential and most receptive
sub-group. Further details about the results of this
This latter group of ‘Permanent non-borrowers’
(PNB) is very large and makes up approximately half
(47%) of all UK smaller business owners. In general,
a disproportionate percentage of these companies are
small, with no employees. They are also less likely to
expect to grow or be international or innovative. For
the purposes of our segmentation, this group has been
excluded; however, it has not been established yet how
durable PNB intention not to use external ÿnance is, and
whether some proportion of this group shifts each year
within their group in terms of needs and attitudes towards
ÿnance which make them distinct from the other groups
on average (ÿgure A.8).
The segment most likely to have high growth ambitions are
‘Quicksilvers’, which make up 9% of SMEs. Although not
all Quicksilvers have achieved 20+% growth on average
over 3 years, nearly all such companies have the growth
mindsets consistent with the Quicksilver attitudinal
segment. Quicksilvers have the largest proportion (37%)
of smaller businesses planning to grow more than 20%
over the next year and Quicksilvers (62%) are also most
open towards use of external ÿnance to help growth.
most ambitious growth plans, and could have the largest
potential positive impact on UK economic and job growth.
However, as they try to scale-up, many have issues with
15
ÿnance applications, experiencing rejection, and an inability
to borrow and raise equity. These smaller business owners
are relatively well informed about ÿnancial products but
FIG A.10
PLANS FOR BUSINESS TURNOVER OVER THE NEXT YEAR,
BY SME SEGMENTATION
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset
ending Q2 2017
50
45
40
35
30
Per cent 25
20
10
5
as their circumstances change.
These are the fastest growing businesses, with the
segmentation analysis, and its application to policy
The 4 segments amongst UK smaller business owners
can be found in this section.
who use external ÿnance demonstrate commonalities
FIG A.8
SME MARKET SEGMENTATION, EXCLUDING PERMANENT NON¬BORROWERS
Source: British Business Bank
CONTENTED
FIGHTERS
Undemanding and unworried. The least likely to
Trying to overcome obstacles and grow.
be innovative and international, and with the
Tend to be somewhat ambitious, international
lowest growth ambitions. Relatively ÿnancially
and innovative. Most likely to report obstacles to
conÿdent, but not informed.
running their businesses, including those relating
to cashœow, skills, politics, the economy and
access to ÿnance.
SAVVY ENTREPRENEURS
QUICKSILVERS
in their own abilities, but also the highest levels of
Innovative, international and formal. The most
conÿdent in their own abilities to assess ÿnance
options. Most likely to have a ÿnancial qualiÿcation.
conÿdence that their banks would provide ÿnance if
Growing, successful, but somewhat vulnerable. The fastest-
applied to. Perhaps consequently, ‘Savvy Entrepreneurs’
growing businesses with the most ambitious growth plans.
tend to be less open to external information and believe
Relatively international and innovative. Somewhat conÿdent
that they already know what they require.
in their abilities to assess ÿnancial options and relatively
more likely to employ someone with a ÿnancial qualiÿcation.
Nevertheless, have had some issues with previous
rejections by a bank.
less so than Savvy Entrepreneurs. Quicksilvers, furthermore,
are also more open to seeking out and absorbing external
information that helps them which suggests an opportunity
exists to target them with useful support.
‘SAVVY ENTREPRENEURS’
In contrast, the ‘Savvy Entrepreneurs’ segment (which is
6% of SMEs), are the most ÿnancially informed and most
likely to have a ÿnancial qualiÿcation. These business
owners either are or have run more than one business
either in parallel or are serial entrepreneurs. These
businesses tend to be more innovative, international and
run with formal processes than average. Their experience
and track records are valuable, visible, and veriÿable.
This group not only self-reports the highest conÿdence
0
Contented
Fighters
Savvy
Quicksilvers
Entrepreneurs
To grow more than 20%
To grow but by less than 20%
To stay the same
FIG A.11
ATTITUDES TOWARDS GROWING A BUSINESS
AND USE OF EXTERNAL FINANCE
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset
ending Q2 2017
80
70
60
50
Contented
Fighters
Savvy
Quicksilvers
Entrepreneurs
Will accept slower growth rate rather than borrowing to grow faster
Are happy to use external ÿnance to help grow and develop the business
Per cent 40
30
20
10
0






























































































































































































22 BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2017/18 23
1.2
REGIONAL ACCESS TO FINANCE
FIG A.12
SHARE OF SMEs LIKELY TO HAVE A NEED FOR MORE EXTERNAL
FINANCE / APPLY FOR MORE FINANCE IN THE NEXT 3 MONTHS
Source: British Business Bank analysis of SME Finance Monitor 10 quarter dataset
ending Q2 2017
35
30
25
‘FIGHTERS’
Not all segments show such conÿdence. 7% are ‘Fighters’
and they are deÿned heavily by their perception of facing
many obstacles. These include managing cashow,
customer late payment, skills, political shocks, economic
headwinds, as well as access to ÿnance. Nevertheless,
beyond their daily concerns, some of these businesses
are still trying to achieve their ambitions, including
through innovation and international activity. Fighters
are the most likely to identify a need for external ÿnance
(30%), or apply for more external ÿnance (25%) (ÿgure
A.12). Clearly, not all Fighters will succeed in overcoming
their immediate issues but as a group they are also very
open to external information and practical support.
SME SEGMENTATION INSIGHTS ENABLE POLICY
RESPONSES TO BE TARGETED AND MORE EFFECTIVE
At this point in the UK economic cycle, we believe that
the Quicksilver segment is the most attractive to target
from an information provision policy perspective. This is
because their attitudinal openness means they have the
• Where a smaller business is based can be an
important factor in their search for ÿnance
• Bank lending is largely distributed in the UK in line
with the overall business population in most areas
• Equity deals are concentrated in London
Where a smaller business is based can sometimes have a
signiÿcant impact on their ability to ÿnd the ÿnance they
need. The Beneÿts of Diverse Smaller Business Finance
Markets publication highlighted place as one of the key
issues to consider when thinking about diversity from
both a demand and supply perspective.18 This section
brings together the latest data from a range of sources
on the volume and value of various types of external
ÿnance provided to smaller businesses in di¤erent areas
highest potential to be inuenced by policy interventions.
20
and highlights recent bank analysis that helped inform
• However, clusters of equity activity do exist
Per cent a new programme to support developing clusters of
Improving the level of awareness and understanding of
throughout the country
business angels outside of London.
BANK LENDING IS LARGELY DISTRIBUTED IN THE UK
the full range of ÿnancial products available to this group
15
is likely to also improve the ełciency of capital allocation
• Business angel activity is also concentrated
within the UK economy.
10
in London and displays di©erent investment
IN LINE WITH THE OVERALL BUSINESS POPULATION
characteristics to those located outside of London
It is worth noting that Quicksilver companies are found
IN MOST AREAS
5
0
Contented
Fighters
Savvy
Quicksilvers
Total
Entrepreneurs
(excluding
permanent
non-borrowers)
Very or fairly likely to have a need for more external ÿnance in the next 3 months
Very or fairly likely to apply for more external ÿnance for the business in the
next 3 months
in all industries and regions of the UK, and amongst
companies of all ages and sizes. This is consistent with
the ÿndings of the ScaleUp Institute Review which found
that scale-up companies that had achieved more than
20% growth over 3 years are geographically spread
across the UK.17
Further work has been done to understand how to
quickly and reliably identify which segment a company
belongs to, technical details are discussed in section 2.3
(Use of external ÿnance).
BRITISH BUSINESS BANK DEMAND
SIDE RESPONSE
To tackle information failures which a¤ect demand for
• Increasing the number of Business angels o©ers a
potential solution to address regional di©erences
in the availability of equity ÿnance
FIG A.13
SHARE OF VALUE AND VOLUME OF BANK LENDING AND
BUSINESS POPULATION ACROSS GREAT BRITAIN
Source: BEIS 2017 Business population estimates, UK Finance (year ending Q3 2017)
and British Business Bank calculations
25
20
Bank lending is an example of a product where the
regional distribution of lending more closely matches the
distribution of the business population. Of the 11 English
regions and devolved administrations bank lending is
close to or exceeds the share of the overall business
population (ÿgure A.13).19 The 2 notable exceptions are
London and the South East which have proportionately
lower shares of bank lending in terms of the number
of loan facilities approved compared to the share of
businesses in the region. For London this also extends to
the value of the loan facilities approved, with the South
East having a slightly higher share of business population
compared to share of loan value approved.
The lower share of bank lending in London and the South
15
Per cent SME ÿnance the British Business Bank is implementing
a new targeted information strategy. This new ‘targeted
East (compared to business population) does not imply
these regions have proportionately less access to bank
approach’ is intended to complement the Bank’s ongoing
10
lending. Two main factors are likely to drive this result,
‘whole of market’ activities which provides ÿnance
discussed below.
information aimed at all smaller businesses.
5
A recent OECD report highlighted the challenges posed
To deliver this new targeted information strategy we
are developing a digital hub which will contain best in
class content. We are initially focussed on the needs of
when analysing regional data. Business population data
can be susceptible to headquarter bias.20 This is due to the
0
misallocation of ÿgures to the region of the headquarters
(rather than to the region of location of the economic
activity). The report notes this is particularly the case for
capital city regions. Using London as our example, it is likely
the number of businesses reported as being in London
signiÿcantly overstates the actual number of businesses
carrying out their day-to-day business in London.
London South EastSouth West East MidlandsWest Midlands East of England Yorkshire & the Humber North EastNorth West Wales Scotland potential and high growth SMEs.
A targeted approach for information delivery will not
sideline or replace the Bank’s existing work to provide
information for the market as a whole. It represents a ÿrst
step towards a more dynamic and intelligent framework
for delivery of SME ÿnance information. We will learn from
No. of loan
Value of loan
GB business
facilities
facilities
population
the early experience of the digital hub to continuously
improve how ÿnance information is delivered to SMEs.
approved
approved
2017


















































































































































































24 BRITISH BUSINESS BANK
FIG A.14
SHARE OF EQUITY DEALS, INVESTMENT AND HIGH
GROWTH FIRMS BY REGION AND DEVOLVED ADMINISTRATION
Source: Beauhurst, ONS and British Business Bank calculations22
70
60
50
This is partly due to the increased number of software
deals in recent years, which may have contributed to the
increased concentration of deals in London over time.
For instance, the number of software deals (by unweighted
count) increased by 304% between 2011 and 2015
compared to 144% for non-software. The report found
61% of all software deals are in London, compared to
43% of non-software deals.
SMALL BUSINESS FINANCE MARKETS 2017/18 25
Whilst the overall UK market, dominated by London, has
developed over the last few years, in areas outside of the
capital, demand and supply side factors are likely to interact
leading to a ‘thin market’. Limited numbers of investors
and entrepreneurial growth ÿrms have diłculty ÿnding
and contracting with each other at reasonable costs.
Thick markets are characterised by high levels of repeated
interaction between VC and high-growth ÿrms, so that
human capital is built up in the sector, with a large enough
market for an ecosystem of supportive activities to develop.
HOWEVER, CLUSTERS OF EQUITY DEAL ACTIVITY DO
EXIST THROUGHOUT THE COUNTRY
English regions and devolved administrations obscure
A second reason is that businesses in London and the
South East may have greater access to, and awareness
of, alternative sources of ÿnance, such as equity, when
compared to those in other regions so are less reliant on
banks for ÿnance.
The diverse spread of bank lending does not mean that all
The distribution of non-software deals is more nuanced
with London having a higher density of earlier stage
and smaller deals (less than £1m), but growth stage
deals in non-software sectors are slightly more spread
out throughout the UK and are closer to the wider
distribution of HGFs. For instance, London’s share of
debt ÿnance products are utilised to a similar level across
growth deals in non-software sectors is 28% which is
40
Per cent the large variation in equity deal numbers that occur
within these areas. Equity deals tend to be grouped in
the UK. Marketplace lending platforms are accessible by
more in line with the region’s share of HGFs.
30
both funding providers and borrowers online, so distance
20
The Equity Tracker report identiÿed speciÿc supply side
geographic clusters where innovative companies, skilled
should be less important. However, survey evidence
10
and demand side factors that have contributed to the
labour and equity investors locate close together to
suggests funders and borrowers on these platforms are
0
di¤erences in the availability and use of equity ÿnance
minimise time and travel costs and share the beneÿts
London South EastScotland East of England North West South West Wales Equity Deals (Q4 2016-Q3 2017)
Yorkshire and Humberside West Midlands North EastNorthern Ireland East Midlandsconcentrated in London and the South East.21
Furthermore, a diverse regional spread of bank lending
across regions and devolved administrations. The
from greater networking.
following numbers are updated from those previously
The British Business Bank 2017 Equity Tracker report
does not imply that all smaller businesses across the UK
published in the 2017 Equity Tracker report, reecting
showed the top 25 Local Authority Districts by number of
receive the appropriate level of debt ÿnance. The market
the latest available data:
deals in 2016. Whilst Boroughs in London formed nearly
failures that underpin the British Business Bank’s debt
interventions still apply.
half of the top 25 areas, there are important equity hotspots
SUPPLY SIDE
outside of the capital. This includes the established equity
• A lack of equity fund manager presence in areas
eco-systems of Oxford and Cambridge, but also cities like
outside of London could explain some of the lower
Edinburgh, Manchester, Cardi¤, Bristol, Glasgow, Shełeld,
Equity Investment (Q4 2016-Q3 2017)
EQUITY DEALS ARE CONCENTRATED IN LONDON
HGFs (2015)
Equity is a key part of the funding mix for High Growth
Firms (HGFs) so rather than comparing the usage of equity
to the total business population it is better to look at the
usage of equity compared to HGFs for regional comparisons.
HGFs are located in all areas of the UK. Only a small
proportion of HGFs are likely to be using equity ÿnance,
but for some high growth potential ÿrms, equity ÿnance
is the only funding source that can enable them to
achieve their growth. It is therefore important that high
growth potential ÿrms have access to equity ÿnance in
order that they can reach their potential.
Despite this wide dispersion of HGFs, equity investment
continues to be geographically concentrated in London
with 52% of total deals and 65% of investment value
over the past 12 months occurring in the capital city.
London’s share of equity investment by both number of
deals is signiÿcantly overrepresented when compared to
its share of HGFs (20%) (ÿgure A.14).
The 2017 Equity Tracker report identiÿed regional
disparities in equity ÿnance have worsened over time
with London and the South East having increased their
share of equity investment over recent years. In 2011,
44% of the UK’s equity deals were completed in London
and the South East, but by Q3 2017 this had risen to 63%.
availability. This is especially the case as investors
often prefer to invest locally to minimise their time
and travel costs.23 British Business Bank analysis of
PitchBook in January 2018 shows of the 626 active
investors24 with VC listed as one of their investment
strategies, 74% have their head o¢ce listed with
a London address (461).25 There are 165 investors
(including public sector backed fund managers) listed
with a head o¢ce located outside of London. This
may underestimate the presence of equity investors
in areas outside of London as many large investors
have regional o¢ces.
DEMAND SIDE
• Smaller business awareness of equity ÿnance from
VCs and business angels is lower in areas outside of
London compared to the capital. Lower awareness of
equity funding options may lead to lower willingness
to use equity ÿnance, even if supply was increased.
The 2017 British Business Bank Finance survey
shows 69% of SMEs in London are aware of VC as a
source of external ÿnance compared to 58% in the
North and 61% in the Midlands.
Leeds and Birmingham. The continued development and
expansion of these technology clusters around the UK is
important, as they provide the focal point for increasing
the amount of equity ÿnance throughout the whole UK.
Tech City acknowledges that the “face-to-face networking
that these [accelerators, a¤ordable co-working spaces and
experienced mentors] enable is hugely important
to the growth and success of digital businesses”.26
Networks can also beneÿt equity investors, as greater
deal syndication is found to increase the likelihood of
successful exit outcomes, especially for geographic or
sector speciÿc networks of investors.27
BUSINESS ANGEL ACTIVITY IS ALSO CONCENTRATED
IN LONDON AND DISPLAYS DIFFERENT INVESTMENT
CHARACTERISTICS TO THOSE LOCATED OUTSIDE
OF LONDON
Business angels are High Net Worth Individuals that invest
their own money in small growing businesses through
an equity stake. Business angels are an important source
of ÿnance for SMEs. Quantifying the number of deals
involving business angels is diłcult as business angels
are less likely to be driven to seek publicity on completing
investments, and so are largely missing from investment
numbers in data sources like Beauhurst.
























































































































































SMALL BUSINESS FINANCE MARKETS 2017/18 27
26 BRITISH BUSINESS BANK
FIG A.15
SHARE OF EIS AND SEIS DEALS, HIGH GROWTH FIRMS, NUMBER
OF BUSINESS START¬UPS AND NUMBER OF HIGH NET WORTH
INDIVIDUALS BY REGION AND DEVOLVED ADMINISTRATION
Source: HMRC, ONS, Barclays and British Business Bank calculations
50
40
Many business angels use Enterprise Investment Scheme
(EIS) tax relief within their investments, which can provide
an estimate for the total amount of business angel activity
in the UK. The Angel Spotlight report produced by British
Business Bank and UK Business Angel Association conÿrms
that 87% of angels who invested in 2016 used EIS or SEIS.
HMRC data shows that 3,470 companies raised a total
• Di”erences in factors a”ecting investment decision:
Investee companies’ management team’s skills and
experience, the potential for growth and the expected
ÿnancial returns are the main factors inœuencing the
decision to invest for businesses angels wherever
they are based. However, angels based outside of
London are more likely to look for investments where
Business angels provide non-pecuniary beneÿts through
the expertise they share which can beneÿt their investee
companies. Business angels often have direct sector
or business experience which they share with their
investment companies. This will have a positive impact
on business growth in addition to the funding the
company receives.
of £1.9bn of funding in 2015-16 under the EIS scheme.28
they can add their skills and experience (46% cited it
30
The 2017 Autumn Budget announced that the British
An additional 2,360 companies also received investment
as important compared to 25% in London). Location
Business Bank will shortly launch a commercial investment
20
through the Seed Enterprise Investment Scheme (SEIS)
of investments is a consideration for business angels
programme to support developing clusters of business
10
in 2015-16 raising £180m of funding. This shows the
outside of London (10%), whilst no angels in London
angels outside of London.
importance of angel funding to UK companies, which
reported this as an important factor inœuencing their
0
Per cent exceeds the number of companies funded by VC funds.
EIS and SEIS deals are highly concentrated in London and
the South East with 46% and 17% of all deals located
in these regions respectively in 2015/16. This is despite
London accounting for only 26% of start-ups and 20%
of HGFs (ÿgure A.15).
decision to invest.
INCREASING THE NUMBER OF BUSINESS ANGELS
OFFERS A POTENTIAL SOLUTION TO ADDRESS
REGIONAL DIFFERENCES IN THE AVAILABILITY
OF EQUITY FINANCE
This will add to the range of regionally focused activity
in the British Business Bank’s portfolio. The role out
of regional funds such the Northern Powerhouse
Investment Fund and the Midlands Engine Investment
Fund is continuing, enabling more businesses in those
regions to access debt and equity ÿnance. The British
Business Bank is also establishing the Cornwall & Isles of
Scilly Investment Fund in partnership with the Cornwall &
Isles of Scilly Local Enterprise Partnership. As announced
in the government’s Industrial Strategy the British
Business Bank will be rolling out a network of regional
managers by autumn 2018 to ensure businesses across
the UK know how to access sources of investment.
London South EastEast of England South West North West West Midlands Scotland East MidlandsYorkshire & the Humber Wales North EastNorthern Ireland Number of EIS
& SEIS deals
(2015-16)
Number of
HGFs (2015)
Number of
business start-ups
(2015)
Number
of HNW
individuals
The Angel Spotlight Survey also conÿrms a lack of angels
located in areas outside of London and the South East.
57% of business angels responding to the survey were
located in London or the South East, with just 7% based
in the Midlands and 7% in the North.29
The survey also identiÿes interesting di¤erences between
angels located in London and those located outside:30
• Di”erences in experience: Business angels located
outside of London are likely to be older and more
experienced than angels located in London. The
average time spent investing as an angel in London
is 5.8 years (median 4 years) compared to 9 years
(median 7 years) for angels located elsewhere.
• Di”erences in involvement in investee companies:
Angels in London are more likely to have a passive
shareholder role (87%) compared to angels outside
of London (63%), which reœects a lower proportion
sitting on the board (30% compared to 58%). This
may be due to London based business angels being
more likely to use crowdfunding platforms to make
investments (47% of angels in London have invested
through a crowdfunding platform in 2016/17
compared to 32% outside of London).
Equity investors, especially those making smaller
investments into smaller companies often prefer making
investments in business that are geographically closer.
This is because they can spend signiÿcant amount of time
with their portfolio company getting to understand the
business. Anecdotally, it is often reported that a two-hour
travel time is often used as a guide for investing. Therefore,
the supply of equity ÿnance is likely to be linked to the
location of where equity investors are based. Encouraging
higher levels of business angels o¤ers a potential mechanism
for addressing regional imbalances in the availability of
equity ÿnance.
This is because business angels have the potential to be
more geographically dispersed throughout the UK than
other equity investors. Out of the estimated 625,000 total
number of millionaires in the UK, ÿgure A.15 shows 74%
are located outside of London.31 Not everyone will have the
skills, experience or desire to become a business angel,
but it does suggest the potential ow of individuals
that could become business angels is more regionally
dispersed than the current location of equity investors
where 74% have a head ołce based in London.























































































































































28 BRITISH BUSINESS BANK
1.3
PATIENT CAPITAL FOR SCALE-UPS
• Patient capital is long-term investment in
innovative ÿrms looking to scale up
• Analysis conÿrms there is a shortage in the
availability of patient capital to UK high growth
potential ÿrms leading to fewer businesses
scaling up
• The British Business Bank will increase the amount
of longer-term ÿnance available to innovative,
high-growth smaller businesses through the
package of support announced at Autumn Budget
The Government has recently published its response to the
Patient Capital Consultation.32 This section summarises
the evidence on the availability of patient capital to
high growth innovative ÿrms from the Patient Capital
Consultation including contributions from the British
Business Bank. The section will then explain how the
British Business Bank will use the additional funding it
received to increase the availability of patient capital to
growing businesses.
PATIENT CAPITAL IS LONG¬TERM INVESTMENT IN
INNOVATIVE FIRMS LOOKING TO SCALE UP
The consultation deÿned patient capital as “long-term
investment in innovative ÿrms led by ambitious
entrepreneurs who want to build large-scale businesses”.33
Finance is typically provided through an entrepreneur’s own
long-term commitment to their business and in some
instances through equity investment from external investors,
such as business angels, venture capital funds or public
markets. It is diłcult to classify the investment time
horizon as this varies by sector, from 3 to 5 years in some
sectors like ICT to as long as 10 to 15 years in others.
Patient capital supports smaller businesses enabling them
to grow into large businesses, which has an important
impact on UK productivity through the di¤usion of
new ideas into the economy. A lack of suitable patient
capital investment can hold back UK businesses from
successfully commercialising their innovation leading to
missed opportunities and lower economic output.
The UK has a high business birth rate and high proportion
of businesses exhibiting high growth compared to other
European countries, but the UK and Europe has generally
performed poorly compared to the US in the process of
scaling up successful start-ups.34 The Consultation describes
how this is seen in the lower number of unicorn businesses
and wider evidence that the UK and other European
economies show a signiÿcantly higher proportion of static
ÿrms that do not shrink or grow compared to the US.35
ANALYSIS CONFIRMS THERE IS A SHORTAGE IN THE
AVAILABILITY OF PATIENT CAPITAL TO UK HIGH
GROWTH POTENTIAL FIRMS LEADING TO FEWER
BUSINESSES SCALING UP
The UK funding eco-system is currently not fully connected
and able to support high growth businesses from early
stage through to listing on a public market, despite recent
improvements in the availability of seed stage funding in
recent years. The historic shortage of risk capital available
in the UK is well-documented with successive Government
reviews identifying a lack of long-term capital in the UK and
a shortage of investors able to make larger investments.
Empirical analysis published in last year’s (2016/17) British
Business Bank Small Business Finance Markets report
quantiÿed the extent to which UK VC backed companies
received fewer later stage follow on rounds compared to
US companies (ÿgure A.16).36 The report also identiÿed
subsequent deal sizes for follow on rounds are smaller
in the UK compared to their US counterparts (ÿgure
A.17). This suggest UK VC backed companies could be
underfunded compared to their US counterparts, which
could impact on their ability to grow and scale up.
More recent analysis contained in the British Business
Bank 2017 Equity Tracker report show UK VC investors
appear to exit their investments at a relatively early stage
compared to investors in the US, which reduces the
ability of businesses to scale up (ÿgure A.18).37 UK VC
backed companies that successfully exit receive fewer
funding rounds on average compared to companies in
the US (1.9 compared to 2.7) companies with di¤erences
existing across all the main exit routes. Developing a
company to be a position to be able to IPO requires more
funding than developing a company for a trade sale.
The analysis showed that it takes 3.5 funding rounds on
average to exit via an IPO compared to 2.4 for a trade sale.
Respondents to the Patient Capital Consultation conÿrmed
a gap in follow-on investment for businesses that had
already received initial investment. This was sometimes
deÿned by stage of investment, focusing on Series “B” to
Series “D” funding rounds. Other respondents referred
to investment size, with £5 million to £50 million being
quoted most often as the weakest range of investment.
The Patient Capital Review Industry Panel also identiÿed
a speciÿc problem for companies requiring more than
£5m of equity investment.38
SMALL BUSINESS FINANCE MARKETS 2017/18 29
FIG A.16
COHORT ANALYSIS OF COMPANIES RECEIVING SERIES A/SEED
FUNDING IN 2008¬10
Source: British Business Bank analysis of Preqin
FIRMS WITH SUBSEQUENT FUNDING ROUNDS
62%
32%
9%
3%
0%
0%
(After Seed/Series A, 2008-10 cohort)
FIG A.17
B
68%
C
D
E
F
G
23%
10%
3%
1%
UK
US
43%
AVERAGE DEAL SIZE BY FUNDING ROUND
Source: British Business Bank analysis of Preqin
75
50
25
25
50
75
£ million
3.1
4.6
8.3
16.9
4.1
7.2
12.7
22.6
A
B
C
D
E
F
23.1
67.8
41.6
71.1
UK
US
FIG A.18
AVERAGE NUMBER OF FUNDING ROUNDS BY EXIT ROUTE
Source: British Business Bank analysis of Preqin
4
3
2
1
0
IPO
Trade Sale
Secondary Sale
All successful
exits
UK
US
Rest of Europe
All Areas






















































































































































































30 BRITISH BUSINESS BANK
The UK (and Europe) has a thinner VC market than the
US. Last year’s Small Business Finance Markets report
noted that the European VC industry is trapped in a
sub-optimal investment cycle with low ÿnancial returns,
smaller fund sizes and smaller deal sizes. The British
Business Bank 2017 Equity Tracker report conÿrmed:39
• UK VC funds are around 1.5 times smaller on average
than the average US VC fund (£118m compared to
£180m), which limits their ability to do larger deals
• The vast majority (98%) of US VC fundraising
comes from institutional sources like pension funds,
insurance companies, foundations/endowments,
etc., whilst in the UK it is much lower (55%)
• The UK has fewer Limited Partner (LP) investors
investing in each VC fund compared to the US.
The average US VC fund has 5.2 LP investors
compared to 2.9 in UK and 3.0 in Rest of Europe.
This was veriÿed by the Patient Capital Industry Panel that
observed institutional investors currently allocate most of
their capital to listed (and therefore liquid) assets, with a
lower exposure to equity compared to a decade ago. Only a
small percentage of their assets are allocated to ‘alternatives’,
of which a smaller proportion still is allocated to venture
capital. The panel observed several reasons for the low level
of investment into VC by institutional investors. The UK
was perceived to have too few large VC funds and relatively
unattractive ÿnancial returns. To be attractive to investors,
the panel suggested VC returns need to show a premium
over listed equities of at least 2-3%, to compensate for
the lack of liquidity and lack of control, but historically,
the average UK VC fund has been unable to achieve this.
The UK pensions market was also judged to be heavily
fragmented relative to other G7 countries and so less
able to invest in risky or illiquid assets.
There are also barriers on the demand side. Some high
growth businesses do not use equity ÿnance because they
fear losing control, thinking it is not a suitable form of ÿnance.
In addition, many reported not really knowing much about
equity ÿnance as a reason for not using equity funding.40
THE BRITISH BUSINESS BANK WILL INCREASE THE
AMOUNT OF LONGER¬TERM FINANCE AVAILABLE TO
INNOVATIVE, HIGH¬GROWTH SMALLER BUSINESSES
THROUGH THE PACKAGE OF SUPPORT ANNOUNCED
AT AUTUMN BUDGET
Following the Chancellor’s announcement at Budget 2017,
the British Business Bank welcomes the £2.5bn of additional
funding that has been made available to it to support UK
smaller businesses looking to scale-up and realise their
growth potential, in order to tackle the patient capital
funding gap.41 The Bank will work to increase patient
capital through the following new and existing programmes:
• A new £2.5bn Patient Capital entity will be incubated
within the Bank to commercially co-invest alongside
private sector investors into venture and growth
capital funds. The entity will be designed from the
outset with a view to a future sale into the private
sector once it has built its portfolio and track record,
subject to a value for money assessment
• British Business Investments – the Bank’s existing
commercial arm – will cornerstone a small number
of large scale, private sector managed fund of
funds, which will increase the availability of patient
capital investment into high growth potential
businesses. A ‘Request for Proposals’ to manage
the ÿrst phase of these funds (up to £500m) will
be issued early 2018, and 2 subsequent phases are
possible subject to the market response
• The Enterprise Capital Fund (ECF) programme will
be maintained, and will continue its important role in
backing new and emerging fund managers unlocking
at least £1.5bn of new investment. This will provide
stability to the market, and publicly recognises the
central role this programme plays in the Bank’s
equity o©ering.
The overall aim of these measures is to increase access to
longer-term ÿnance for innovative, high-growth smaller
companies so they can achieve their full growth potential.
The British Business Bank aims to achieve this by crowding
in private capital, expanding investor diversity, and utilising
and developing private sector fund management expertise.
This will help break the current sub-optimal investment
cycle by creating funds of sułcient size that can make
follow on investments in their most promising companies.
We aim to use the Bank’s position as the second largest
Limited Partner in the UK venture capital market to
demonstrate the attractiveness of this market to
investors, with the longer-term ambition of supporting
the development of sustainable private sector expertise
in the UK.42
SMALL BUSINESS FINANCE MARKETS 2017/18 31
1.4
INTERNATIONAL COMPARISONS OF
SMALL BUSINESS FINANCE MARKETS
• UK smaller business population concentrated in
service sector and growing relatively rapidly
• The UK economy is successful at generating start-ups
• Improved performance in translating start-ups into
scale-ups
• UK SMEs have similar patterns in obtaining ÿnance to
our major competitors
• Equity ÿnance is twice as large in the US compared to
the UK, but the UK performs relatively well compared
to other European countries
FIG A.19
SHARE OF ENTERPRISES BY SIZE
Source: OECD, Entrepreneurship at a Glance, 2017
100
80
60
40
20
0
France
United
Germany
United
Kingdom
States
1-9
10-19
20-49
50-249
250+
Employees
Per cent This section explores UK small business ÿnance markets
in comparison to those in major competitor countries.
First, the current structure of the economy is examined by
ÿrm size showing that the UK has a similar concentration
in micro and small businesses as in major competitors.
Second, the dynamic nature of the small business
population is considered, looking at births, growth
performance and deaths. This highlights the strong
performance of the UK economy in generating start-ups,
while the record of translating those into high growth
ÿrms has improved in recent years.
Third, the use of external ÿnance is compared, with UK
SMEs similar in their use and experience of most types
of debt ÿnance, but usage of equity ÿnance to support
scale-ups, whilst improving, still falls behind the US.
Comprehensive data allowing direct international
comparisons of small businesses has traditionally been
limited, not least because of di¤erences in the precise
deÿnition of small businesses. Data availability is,
however, improving.
First, the OECD produces regular publications on the
overall partners of entrepreneurship43 and ÿnance
used by SMEs. Second, the European wide survey run
by the European Commission and the European Central
Bank called Survey on access to ÿnance of enterprises
(SAFE) o¤ers good insight into the experience of small
businesses using external ÿnance. 44, 45 However, relatively
small individual country sample size mean that some
caution is required in highlighting international di¤erences.
Where SAFE is used in this report data refers to the latest
wave of the survey taking place in September and October
2017 unless otherwise stated.
The approach taken in this chapter is to make comparison
with the UK’s major international competitors, ie the
US, Germany and France, bringing in other countries
where relevant.
UK SMALLER BUSINESS POPULATION CONCENTRATED
IN SERVICE SECTOR AND GROWING RELATIVELY RAPIDLY
Unsurprisingly, smaller businesses, and more speciÿcally
micro-businesses (those with fewer than 10 employees),
account for the overwhelming majority of enterprises
in all OECD economies.46 The UK has a higher share of
micro-enterprises than Germany and the US47 but a
lower share than France (ÿgure A.19).







































































































































32 BRITISH BUSINESS BANK
THE UK ECONOMY IS SUCCESSFUL AT GENERATING
START¬UPS
International comparison shows that the UK has been
e¤ective at starting up active employer enterprises. In 2014,
the UK had the highest number of births in terms of
employer enterprises with nearly 300,000 births. Figure
A.24 shows birth rates48 in the UK exceeding that in France,
SMALL BUSINESS FINANCE MARKETS 2017/18 33
FIG A.23
SIZE DISTRIBUTION OF MANUFACTURING FIRMS
¯NUMBER OF EMPLOYEES°
Source: OECD, Entrepreneurship at a Glance, 2017
80
70
60
1-9
10-19
20-49
50-249
250+
FIG A.20
The OECD data also allows comparison of the value added
Germany and the USA. Amongst the wider OECD dataset
50
40
Per cent VALUE ADDED BY ENTERPRISE SIZE ¯NUMBER OF EMPLOYEES°
by enterprise size. Figure A.20 shows a similar pattern
only Hungary and Poland exceed the UK on birth rates.
Source: OECD, Entrepreneurship at a Glance, 2017
for value added as that observed for share of enterprises.
A high birth rate may not be a sign of success if the survival
60
Compared to Germany, the UK has a higher share of value
rates of those businesses is low. The UK however, also has
30
added in micro and large businesses. France, however has a
50
a high one-year survival rate with rates in the US and the
20
slightly greater share of value added than the UK in micro
UK signiÿcantly above France and Germany (ÿgure A.25).
40
and small businesses, but less in medium and large businesses.
10
And not only do the UK’s start-ups have relatively good
Per cent 30
Following a decline in enterprise numbers in 2009, there
survival rates, but they also make a signiÿcant contribution
0
has been an upward trend in the number of SMEs in major
20
to employment. The UK is the only country in the OECD
economies since 2012. The latest available data in the
United Kingdom
Germany
database where start-ups, deÿned here as those up
10
OECD database reports that the UK SME population was
to 2 years old, account for more than 35% of employer
FIG A.24
6% higher in 2014 than in 2008 (ÿgure A.21). See section
0
enterprises, with those enterprises accounting for just
EMPLOYER ENTERPRISE BIRTHS AS A SHARE OF ACTIVE
1-9
10-19
20-49
50-249
250+
2.1 for a discussion on more recent trends in the UK SME
United Kingdom
Germany
France
population which shows further rapid growth since then.
EMPLOYER ENTERPRISES
over 10% of employment.
Source: OECD, Entrepreneurship at a Glance, 2017
Finally, international comparison of death rates of employer
FIG A.21
16
There is also some di¤erence in the size and sector
businesses, shows the UK mid-table with the 10.1% of
INTERNATIONAL TRENDS IN SME POPULATION
distribution of SMEs in some of our major competitor
14
Source: OECD, Entrepreneurship at a Glance, 2017
employer enterprises dying in 2014. In summary, this
countries. The high-level sector distribution is shown
demonstrates the success of the UK economy in generating
12
140
in ÿgure A.22. The UK is similar to the US, albeit with a
new start-ups which survive and contribute signiÿcantly
10
slightly lower share of manufacturing in the UK (6.9% vs
to UK employment.
Per cent 130
7.8%) and a higher share of construction (14.9% vs 13.9%).
8
Index: 2008 = 100 120
In comparison to France, the UK has a higher share
IMPROVED PERFORMANCE IN TRANSLATING START¬UPS
6
110
100
90
80
2008
2009
2010
2011
2012
2013
2014
UK
USA
FRA
CAN
ITA
FIG A.22
of service sector enterprises (78.2% vs 73.8%) with
construction accounting for a higher share of enterprises
in France (18.6% vs 14.9%).
As is well known, the UK has a lower share of manufacturing
than Germany (6.9% vs 8.6%). Manufacturing enterprises
in Germany are less likely than those in the UK to be micro
business, but more likely to be small businesses, particularly
10-19 employees (17.4% vs 10.4%), and medium sized
enterprises (7.8% vs 4.9%) as shown in ÿgure A.23.
It is a consistent ÿnding across SME Finance surveys, that
INTO SCALE¬UPS
International comparisons of scale-ups are diłcult as
comparative data is limited, but there are numerous
potential deÿnitions of scale-up. OECD deÿnes high-growth
enterprises as those with average annualised growth in
the number of employees greater than 20% per year,
over a 3-year period, and with 10 or more employees
at the beginning of the observation period.
Based on this OECD deÿnition, there has been an
improvement in the share of high growth enterprises
4
2
0
United
Kingdom
Germany
United
States
France
FIG A.25
SURVIVAL RATE OF ONE¬YEAR OLD EMPLOYER ENTERPRISES
Source: OECD, Entrepreneurship at a Glance, 2017
100
SHARE OF ENTERPRISES BY MAIN SECTORS
the larger the ÿrm, the more likely they are to make use
in the UK between 2012 and 2014, with the number of
Source: OECD, Entrepreneurship at a Glance, 2017
of certain types of external ÿnance. The di¤erence in
80
high-growth ÿrms returning to the long-term average
90
distribution of manufacturing enterprise size, suggests
range of 10 to 12 thousand high growth enterprises
The relatively strong performance of the UK is conÿrmed
20
30
in the latest Eurostat data for 2015.49 Using a deÿnition of
10
20
high growth ÿrms growing employees by 10% or more on
0
average over 3 years, the UK share of high growth ÿrms
0
United
Germany
United
France
exceeds that of Germany and France.
United
United
France
Germany
Kingdom
States
Kingdom
States
Manufacturing
Services
Construction
Industry
Services
Construction
80
that German manufacturers may be more frequent users
per year. Other OECD countries, such as Germany, have
60
70
of external ÿnance than UK manufacturers.
Per cent seen a fall in the share of high growth enterprises in
60
the economy demonstrating the relatively better UK
Per cent 50
40
performance since 2012.
40