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SBFM 2019/20 Report

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SBFM 2019/20 Report Small Business Finance Markets 2019/20 2 Contents CONTENTS FOREWORD 3 EXECUTIVE SUMMARY 5 INTRODUCTION 7 PART A: THEMES 1.1 FIVE YEARS ON– WHAT HAS CHANGED IN SMALL BUSINESS FINANCE MARKETS 8 1.2 IMPACTS OF MACROECONOMIC DEVELOPMENTS ON SME FINANCE MARKETS 19 1.3 FINANCE IN ENTREPRENEURIAL ECOSYSTEMS 27 PART B: MARKET DEVELOPMENTS SMALL BUSINESSES AND THEIR USE OF FINANCE 2.1 SME BUSINESS POPULATION 38 2.2 USE OF EXTERNAL FINANCE 43 2.3 SME FINANCE AT A LOCAL LEVEL 51 FINANCE PRODUCTS 2.4 BANK LENDING 58 2.5 CHALLENGER AND SPECIALIST BANKS 66 2.6 EQUITY FINANCE 73 2.7 DEBT FUNDS 84 2.8 ASSET FINANCE 87 2.9 INVOICE FINANCE & ASSET-BASED LENDING 91 2.10 MARKETPLACE LENDING 94 GLOSSARY 98 ENDNOTES 102 British Business Bank 3 Foreword FOREWORD KEITH MORGAN CBE, CEO, BRITISH BUSINESS BANK The British Business Bank, established in 2014, improves fnance markets for smaller businesses - wherever they are in the UK and wherever they are on their fnance journey – enabling them to prosper and grow. Our sixth Small Business Finance Markets report provides Looking forward, smaller businesses’ confdence is a timely, comprehensive and impartial assessment of showing signs of recovery following the economic and fnance markets for smaller businesses. Its insights and political uncertainty of 2019. The Bank has worked with analysis, combined with our market intelligence and other market participants and Government through the experience as an active market participant, enable the Business Finance Council to ensure smaller businesses Bank to act as a centre of expertise on fnance for smaller can continue to access the fnance they need to grow. UK businesses and advise the Government on their We will continue to monitor markets closely to help fnance needs. smaller businesses respond efectively to the economic opportunities and challenges in 2020. Since the Bank’s creation in 2014, there has been signifcant long-term growth in fnance fows outside of Recognising the importance of smaller businesses traditional bank lending products, with equity fnance being able to access fnance wherever they’re based, more than doubling, marketplace lending exceeding £2bn a key theme of this year’s report is how entrepreneurial in 2018 and asset fnance growing by an average of 7% ecosystems vary across the regions and localities of per year since 2014. This is in contrast to bank lending, the UK. The availability and ease of accessing fnance where fows have been fat in real terms, driven by for smaller businesses depends greatly on locality, weakness in demand for new loans and overdrafts and with disparities particularly apparent in awareness and a reluctance to take on external fnance. availability of alternative fnance options, particularly those that fnance growth. In this report, we examine The past fve years have seen increased competition the characteristics of successful local ecosystems, and innovation in the supply of SME fnance. The and how public and private sector intermediaries can increased diversity in the range of providers, products best collaborate to enhance the development of local and platforms, together with increasing volumes in these fnance markets. markets, means that smaller businesses have more fnance options to choose from than ever before. When it comes to the demand for fnance smaller businesses are also prepared to consider more options, with over half of those businesses that sought fnance in 2019 contacting fnance providers outside the fve main UK banks. Small Business Finance Markets 2019/20 4 Foreword This year, we’ve included more market intelligence The Bank continues to develop a strong evidence base from our own programmes alongside the results of to underpin its interventions and proactively address our expanded Small Business Finance Survey to get a information gaps, such as collaborating with European more complete picture of smaller businesses’ use of development banks on research to understand the and attitudes towards fnance across the UK. There are challenges UK businesses face when investing in signs of improvement in particular hubs – Manchester, digitalisation and working with stakeholders to collect Edinburgh and Cambridge sit alongside 7 London data on the UK’s private debt market and business boroughs in the top 10 of local authority districts for angel investment. number of equity deals in the frst three quarters We continue to expand the network of organisations of 2019. we work with in a bid to deepen our knowledge and However, the Bank recognises there is more to be done understanding of the ways in which fnance markets in addressing regional gaps on both the demand and support smaller businesses. We know that previous supply side. There are several ways the Bank looks to editions of our Small Business Finance Markets report tackle local disparities in fnance markets, supporting have proved to be a valuable source of information for the Government’s aim of ‘levelling up’ the regions: policy makers and others with an interest in ensuring the success of the sector. • With a Government commitment to expand our Start Up Loans programme, we can continue to I hope you fnd this year’s report informative and useful. support entrepreneurial activity, by providing loans and mentoring, across the UK. • We continue to support investment and high-skilled employment through specifc funds operating in the Northern Powerhouse, Midlands Engine and Cornwall & Isles of Scilly regions. • The Bank’s UK Network works with intermediaries to improve connectivity within local and regional ecosystems. • The Bank’s Finance Hub enables smaller businesses to explore the fnance options that would work best for their business and signposts to relevant fnance experts and associations, to ensure that wherever businesses are based they can access reliable, independent information on their fnance options. British Business Bank 5 Executive summary EXECUTIVE SUMMARY Small business fnance markets have always had a key However, many smaller businesses are reluctant to use role to play in supporting small businesses, whether that fnance, with falling demand for core bank products be helping start and grow new businesses or supporting from 2014 to 2018. While use of external fnance did the activities of established SMEs. Business fnance will increase in 2019, the long-term decline in applications for be particularly important as the UK economy adapts to term loans has not reversed. This has been refected in leaving the EU and responds to the opportunities and relatively fat levels of bank lending. challenges ranging from the generation and adoption of The decline in applications refects smaller businesses’ new technologies to increased trade protectionism and continued desire to avoid debt fnance in recent years decarbonisation. with more than 70% of SMEs saying that they This report combines a look at developments in would forego some growth in order to avoid taking on Small Business Finance Markets in the fve years since more debt. In addition, smaller businesses underestimate the Bank was launched, with a more detailed look at their chances of success when applying for fnance. the developments in 2019 and prospects for 2020. Improving the demand side of the small business fnance Four key fndings stand out. market therefore remains a key objective of the British Business Bank. SIGNIFICANT GROWTH IN SME FINANCE MARKETS OUTSIDE OF TRADITIONAL BANK LENDING PRODUCTS INCREASED RANGE OF PROVIDERS IN BANKING AND SINCE 2014 OTHER SME FINANCE PRODUCTS First, there has been signifcant growth in the volume The increase in volume of SME fnance has been matched of fnance supplied to smaller businesses outside of by an increase in the range of providers of products, traditional bank lending products. Notably the value many of them ofering new ways of delivering fnance. of equity fnance has more than doubled, driven by an Between 2013 and 2019 over 40 new bank licences increase in large later stage deals. On the debt side asset were granted, around half of which went to challenger fnance volumes have grown at a compound annual rate or specialist banks that provide services to businesses. of 7% and marketplace business lending exceeded £2bn These range from online only banks to more traditional in 2018. This growth in volumes refected a signifcant branch-based delivery models. increase in SMEs’ awareness of the products available to them and has provided support to a wide range of start- ups and smaller businesses looking to invest and grow. Small Business Finance Markets 2019/20 6 Executive summary Emerging providers of SME fnance have also gained IMPROVING REGIONAL & LOCAL ENTREPRENEURIAL an increased share of other debt product markets, ECOSYSTEMS WILL HELP REDUCE LOCAL ECONOMIC for example the share of asset fnance provided by DISPARITIES independent challenger and specialist banks has Previous Small Business Finance Market Reports have increased steadily in recent years. reviewed the regional distribution of SME fnance. In equity finance there is a greater range of fund This year the report looks in more depth into the managers in the market with 26 funds closing in characteristics of successful entrepreneurial ecosystems. 2019, many of them new or emerging fund managers, This is particularly important in the context of some signs resulting in an increase in available capital. of weakness in entrepreneurial activity in 2019, and slower growth of early stage equity fnance compared to This significant entry of new providers and products late stage growth. has been supported by the British Business Bank which has made an important contribution to growing supply Understanding local ecosystems highlights not just the capacity and helping increase competition in SME links between suppliers and users of fnance, but how finance markets. they interact with other intermediaries. This is the case, both for private intermediaries such as fnancial advisers, ECONOMIC UNCERTAINTY LED TO INCREASED DEMAND accountants and other business services, but also the FOR SHORT-TERM FINANCE IN EARLY 2019 public sector bodies such as growth hubs and Local Turning to more recent developments, 2019 saw a Enterprise Partnerships.
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