Small Business Finance Markets 2020/21 british-business-bank.co.uk Contents Foreword 3 Part B: Market developments 54 Executive summary 6 Small businesses and their use Introduction 10 of finance Aggregate flow and stock of 2.1 Macro-economic developments 55 finance to smaller businesses 12 2.2 SME business population 61 2.3 Use of external finance 67 Part A: The impact of Covid-19 on small business finance markets Finance products and the implications for 2021 15 2.4 Bank lending 75 1.1 Demand and supply of SME 2.5 Challenger and specialist banks 82 finance during the pandemic 16 2.6 Equity finance 89 1.2 Expectations for demand and 2.7 Private debt 102 supply in 2021 29 2.8 Asset finance 111 1.3 Finance can help the UK build 2.9 Invoice finance and back better 41 asset-based lending 116 1.4 The importance of and 2.10 Marketplace lending 121 challenges faced by alternative finance providers in 2020 47 Glossary 126 Endnotes 132 2 0.0 The British Business Bank’s mission is Foreword to make finance markets work better so smaller businesses across the UK can prosper and grow. Small Business Finance Markets 2020/21 Foreword Our unique position at the intersection of Covid-19 has had a devastating effect on the UK government and financial markets enables economy, particularly on the all-important small business sector that accounts for 61% of private sector us to identify and reduce imbalances in employment. It has also had a profound influence on access to finance; create a more diverse the operation of the finance markets serving small market; and increase the supply of finance businesses. We have seen record values of lending, for the entrepreneurs and business owners primarily working capital provided through the at the very heart of the British economy. government’s emergency schemes. However, there has been an overall fall in demand for repayable external Now in its seventh year, our Small Business Finance finance, in part because of extra support provided Markets report gives an independent and by non-debt government schemes such as furlough comprehensive assessment of the market. It continues and grants. to be a vital resource for both our own policy making The pandemic has not affected businesses in a uniform and in our role as a centre of expertise to government. manner. Many businesses in the worst affected sectors This year’s report provides not only a look back at the find themselves with substantial debts - perhaps for impact of the Coronavirus pandemic on smaller the first time – and enabling them to manage those businesses and the finance market, but also a forward debts will continue to be a key priority. On the other look at the role finance will play in supporting economic hand, record cash balances indicate that there are also recovery and future growth. a sizeable number of smaller businesses well positioned to take advantage of opportunities as the economy begins to recover. British Business Bank british-business-bank.co.uk 4 Small Business Finance Markets 2020/21 Foreword Although our Business Finance Survey showed in late This has been an especially challenging period for At this crucial time for the economy, it has never been 2020 a third (33%) of businesses expected to shrink smaller businesses with external finance playing a vital more important to have a deep understanding and over the next year, over a fifth (21%) of businesses still role in business survival in the face of the Covid-19 knowledge of the finance markets which support expected to grow in the next 12 months. Small and pandemic. The British Business Bank has played an UK businesses. I hope this report will provide anyone medium-sized businesses showed most positivity, important role during the crisis and we will continue to with an interest in supporting smaller businesses with with 35% and 38% respectively expecting to achieve support smaller businesses as they steer a path towards useful and valuable insight into what is required for annual growth. a sustainable recovery. In doing so, we will also be their future success. tackling the government’s longer-term priorities of There are also positive indicators that, unlike in the growing the UK as a science superpower, levelling up period following the credit crunch in 2008-9, there will Catherine Lewis La Torre the regions of the UK and moving to a net zero economy. be sufficient supply of finance to meet the expected CEO, British Business Bank demand. Banks look to have sufficient capital available, Our Start Up Loans programme has seen a record and therefore could be well placed to provide the £126m of funding drawn down in 2020, the highest level growth finance that will play a key role in the recovery. since the programme’s inception in 2012 and is able to Many non-bank lenders and their investors show signs support more entrepreneurs in 2021. that they are ready to resume a greater level of activity We also have a wide range of interventions aimed at in 2021, having been less active in 2020 due to the supporting venture and growth capital. This type of dominance of the government’s emergency schemes. finance is vitally important to high-growth firms which Record fundraising in 2020 suggests venture capital have the potential to provide jobs and economic growth. funds also have sufficient capital to invest in high-growth Our British Patient Capital programme has the capacity companies in 2021 and beyond. to deploy an additional £1.5bn available to support investment in these types of businesses. British Business Bank british-business-bank.co.uk 5 0.0 Small business finance markets have Executive always had a key role to play in summary supporting small businesses, whether that be helping start and grow new businesses or supporting the activities of established SMEs. Small Business Finance Markets 2020/21 Executive summary While business finance has been a key This report combines a look at the extraordinary impact Smaller businesses have been particularly impacted by pillar in supporting businesses through Covid-19 has had on smaller businesses and the finance the pandemic. Many reported significant falls in revenue providers that support them, prospects for 2021 and with several industry sectors experiencing notably worse 2020 it will be even more important as the the role finance needs to play to help achieve key outcomes on measures such as redundancies, trading UK economy seeks to recover after the government objectives. Five key findings stand out. status, and turnover. Across all sectors, the smallest Covid-19 pandemic and refocuses on businesses were the most likely to report negative impact from the pandemic and the least likely to have challenges such as transitioning to a net The economy experienced a record resources to help them through. zero economy, levelling up in the UK and contraction as a result of the Covid-19 adapting to life outside of the EU. pandemic and resulting public health measures The 22.1% quarter-on-quarter fall in business investment in Q2 2020 was the largest quarterly fall on record and a The UK suffered a record 18.8% quarter-on-quarter fall result of many companies switching from investment to in GDP in Q2 2020 and while the economy showed survival mode, utilising available funds for cashflow. signs of recovery in second half of the year official forecasts suggest it will not return to pre-pandemic As the year drew to an end, the SME confidence was levels until 2022. In response, the UK government low, with the FSB Small Business Index (SBI) confidence unveiled the most significant package of peacetime measure stood at -49.3, the second lowest reading in interventions to support smaller businesses. Without SBI history, second only to that recorded in Q1 2020. these interventions, the impacts of Covid-19 on the However, since then the UK has concluded a trade economy would have been much greater. agreement with the EU and rolled out a Covid-19 vaccine programme reducing uncertainty for many businesses. British Business Bank british-business-bank.co.uk 7 Small Business Finance Markets 2020/21 Executive summary Equity Investment values also reached record levels in SME lending values have reached record SMEs’ balance sheets have diverged, both cash 2020, up 9% on 2019. Furthermore, the number of deals levels but use of other traditional forms of was up 5%. While the headline figures appear to show UK balances and debt have risen finance is down equity finance had a strong year in 2020 with higher deal The disproportionate impact on SMEs by size and sector Working capital, to cover short-term funding gaps or to and investment figures, equity finance has been affected has left a varying imprint on balance sheets. A continued help during difficult trading conditions, was the dominant by the pandemic. The Future Fund has contributed to the reduction in operating expenses combined with driver of funding needs in 2020, with many smaller continued functioning of UK equity finance markets, as of significant government financial support has led to a businesses facing heightened cashflow issues. Of those 21st January 2021, 1,140 convertible loans have been 20% rise in deposit holdings since the start of the year identifying a need for funding, 78% said cashflow approved to the value of £1.1bn. to a record £252 billion according to UK Finance data. support was the reason for requiring funding in 2020, Despite the challenges faced in 2020 and the record Despite this, while smaller businesses in aggregate do up from 49% in 2019.