ACCESS TO FINANCE
Access to Finance for SMEs
Finance is critical to the success of SMEs.
Limited access to finance is not a new problem
Access to finance for SMEs remains a persistent challenge, dating back to the aftermath of the 1929 crash and the formation of the Macmillan committee to examine the banking industry's impact on British industry. Despite the economy's recent recovery, SMEs continue to face difficulties securing loans from traditional sources such as banks.
The growing number of SMEs, combined with banks' increasingly conservative lending practices and stricter capital requirements, exacerbates the issue. Banks may be claiming to boost their support for SMEs, but a significant funding gap remains, leaving many small businesses struggling to secure the financing they need to thrive.
Post-Covid business outlook still uncertain
According to the Longitudinal Small Business Survey: SME Employers – UK, 2022 report (August 2023), 75% of employers were using some form of external finance, up 1% from 2021 and 12% from 2019.
Following the trend from previous years, the propensity to use many types of listed finance increases with SME size, with 73% of micro firms, 83% of small firms, and 89% of medium-sized using some of form external finance. By nation, 79% of SME employers in Wales used some form of external finance (-1% from 2021) compared to 75% in Scotland (-3% from 2021), 75% in England (+1% from 2021) and 77% in Northern Ireland (-1% from 2021).
In terms of different sectors, SME employers in transport and storage (83%), primary sectors (87%), manufacturing (81%) and construction (79%) were most likely to use external finance. Administration (78%) and arts and entertainment (77%) were also more likely than average to use finance. Use of finance was below average in finance and real estate (65%), other services (68%), education (68%), and information and communication (73%).
The amount of finance sought also varied by size. The median, which better represents the amount that the typical business sought, was £50,000. This was £35,000 for micros, £100,000 for small businesses, and £375,000 for medium-sized businesses. By nation, the median for businesses in Northern Ireland was £37,000, for Scottish businesses £50,000, £50,000 for businesses in England, and £45,000 in Wales.
A comprehensive overview of the SME finance market
The British Business Bank Small Business Finance Markets report provides a comprehensive overview of the markets for different types of debt and equity finance that are most commonly available for SMEs, and indentifys the drivers of the latest trends.
By understanding the nature of the barriers that SMEs can face, and helping educate them about the different types of finance available, the British Business Bank aims to help power the growth and productivity of SMEs, who continue to represent a significant part of the economy.
The British Business Bank Small Business Finance Markets 2023-2024
Key Statistics:
Equity Deals in London: London received 46% of equity deals and 58% of total investment in 2023, showcasing its dominance in the UK equity finance market.
Equity Investment Growth: There has been a 47% increase in the number of equity deals from 2014-2016 to 2021-2023, translating to a 265% increase in investment.
Gender and Ethnic Minority Finance: While the share of equity deals to teams with at least one female founder has increased by nearly 10 percentage points over the past decade, investment in all-female teams remains static at 3%.
Bank Lending: Gross bank lending (excluding overdrafts) declined 9% in 2023 to £59.2bn , reaching levels similar in nominal terms to 2016. The four largest banks and their subsidiaries have seen their share of small business bank lending from 63% in 2014 to 41% in 2023, as new challenger banks have emerged.
Asset Finance: This sector grew for the third consecutive year in 2023 to £23.5bn.
Equity Investment Decline: Equity investment into smaller businesses dropped to levels last seen in 2020.
Future Challenges and Opportunities:
The report identifies four key issues likely to shape small business finance markets over the next decade:
Net Zero Transition: Smaller businesses contribute significantly to the UK's greenhouse gas emissions and will need finance to adopt cleaner technologies.
Artificial Intelligence (AI): AI is expected to influence finance markets by increasing availability and reducing costs of finance to smaller businesses.
Interest Rate Adjustments: Businesses will need to adapt to higher interest rates, which may impact investment and survival rates in the short to medium term.
Economic Dynamism: Rising small business closures could lead to a more dynamic economy by reallocating resources to more productive uses. Support for start-ups and innovative businesses is crucial for resilience and growth.
Find the right finance for your business
Use our Finance Marketplace to find the right type of finance for your company. Whether you are looking for seed capital or debt financing to expand a more established business, we can help you find it.
Find the right finance for your business
Finance for SMEs
What is the right financing option for your business?
Many organisations have highlighted the issue of how important having easy access to finance is for SMEs trying to plan for future growth.
What is Equity finance?
What is Debt finance?
The ICAEW Business Finance Guide
It identifies where your business is in terms of development and growth and offers financing solutions that are relevant to your businesses specific position.
Equity Finance
Equity finance involves giving up a share of your business in return for an investment. Usually made over a medium to long term horizon, the investors share in the profit (or loss) of your business and the increase in value of your business. Depending on the scale and terms of the investment, it can also involve giving up some or all of the control over the business.
Raising equity finance can be time-consuming, requiring you to find the right investor(s). You will need to pitch to the investors so will need very robust materials including a business plan, detailed financial projections and an attractive valuation.
Equity Finance
Equity finance involves giving up a share of your business in return for an investment. Usually made over a medium to long term horizon, the investors share in the profit (or loss) of your business and the increase in value of your business. Depending on the scale and terms of the investment, it can also involve giving up some or all of the control over the business.
Raising equity finance can be time-consuming, requiring you to find the right investor(s). You will need to pitch to the investors so will need very robust materials including a business plan, detailed financial projections and an attractive valuation.
Some common types of equity finance include:
Seed / Angel Investing
Usually the first round of funding, after family, friends and fools! It can be either pre-launch or soon after and is usually for relatively modest amounts in the £10-£200k range.
Often, with little in the way of traction or track record to base an investment on, an angel investor will invest because of a personal interest or particular relevant expertise and will often provide advice about the direction of the business.
IPOs & Others
An Initial Public Offering (IPO) is the process whereby a company offers shares in its business to the public on an exchange. It is usually undertaken by larger, well-established companies looking to access significant sums of investment from a broad range of investors.
Other forms of equity investment include Private Equity where a group of private investors and funds provide (usually) large scale, long term financing for established businesses in return for control of the business.
Venture Capital
More established companies with a measurable track record can access larger pools of capital through the venture capital market. Usually run by professional investors, via a series of funds, the scale of investment can be very considerable, depending on the stage and needs of the company and the nature of the venture capital business or the syndicate of such companies contributing to the investment.
In return for substantial investment, venture capitalists take a larger stake in the business and will seek to exercise a greater degree of control about the direction of the business. They will also, typically, have a 3-5 year investment horizon before seeking an exit.
Crowdfunding
Modern technology has allowed the creation of a number of online platforms that allow new or existing businesses to gain investment from a wide network of small investors.
In return for a small share of the equity of a business, an individual can invest relatively modest amounts in (a series of) companies which are of interest. They can be an efficient way to raise funds for a start-up or new company but
i) they tend to be all-or-nothing so that if the target fund raise is not met then the company gets none of the committed funds
ii) they can be quite expensive once all the crowdfunding platform fees are deducted and
iii) the potentially large number of small investors can take careful management as the company grows.
Debt Finance
Debt finance is a popular way of raising finance. Whilst still allowing the business owner to stay in control, it allows finance to be raised which helps the company grow. Traditionally comprising either bank loans or an overdraft, new forms of debt finance have been developed in the last few years which provide greater options and flexibility for small business owners.
In return for the loan, a lender, who is not sharing in the ownership and therefore the risk of the company, will require a return on the loan i.e. the interest payments and, usually, some security in case the borrower doesn’t repay the loan. In addition, debt providers are generally much less involved in the day to day running of the business and in the provision of support and advice.
Debt Finance
Debt finance is a popular way of raising finance. Whilst still allowing the business owner to stay in control, it allows finance to be raised which helps the company grow. Traditionally comprising either bank loans or an overdraft, new forms of debt finance have been developed in the last few years which provide greater options and flexibility for small business owners.
In return for the loan, a lender, who is not sharing in the ownership and therefore the risk of the company, will require a return on the loan i.e. the interest payments and, usually, some security in case the borrower doesn’t repay the loan. In addition, debt providers are generally much less involved in the day to day running of the business and in the provision of support and advice.
Some common types of debt finance include:
Asset-Based Finance
Fixed Income Bonds
Usually reserved for larger companies, bonds can be an attractive source of long-term funding with terms up to 30 years or more.
Loan & Overdrafts
Along with traditional bank lenders, new lending vehicles have been established such as peer-to-peer business loans (akin to crowdfunding where groups of investors combine to lend money to companies).