Challenger and specialist bank lending reached record of £35.5bn in 2022

Research from the British Business Bank (BBB), UK government’s economic development bank, found that the proportion of lending to small businesses by challenger and specialist banks is now 55 per cent of the market.

Its Small Business Finance Markets 2022/23 report also notes that gross bank lending to smaller businesses in 2022 was £65.1bn, a 12.8 per cent increase from 2021. However, net lending fell by £8.5bn in large part reflecting repayment of Covid loans.

The report also notes that the smaller business asset finance market reached new heights in 2022, with an increase in new business of 11 per cent in 2022 to £22.1bn. This was driven in part by some easing of supply chain shortages and by rising asset prices.

Demand for smaller business finance is down

The research also reveals that there was a considerable drop in the demand for external finance. In Q3 2022, only 33 per cent of smaller businesses were using external finance compared to 44 per cent the year prior.

However, gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures.

For the smaller business equity finance market specifically, investment activity has slowed considerably since Q3 2022. Recent years have seen larger equity deal sizes and increased company valuations but in recent months investors have re-evaluated their positions leading to smaller deals and lower valuations.

Net zero deal numbers outperforming the wider equity market

Data shows that equity finance markets are adapting to growing demand for investment in green innovation with net zero deals outperforming the wider equity market. These deals currently make up 12 per cent of all smaller business equity deals compared to only five per cent in 2018, and deal values are rising even faster. Investment value of net zero-related deals rose by 184 per cent over the past year, soaring to a new record level of £1.7bn.

Louis Taylor, CEO, British Business Bank, said: “Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options. There are promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance. At the British Business Bank, we are committed to supporting these businesses as they seek to achieve sustainable growth, and in turn boost economic productivity, by improving their access to external finance.”