There is strong growth in demand for alternative finance from UK small businesses in a sign that they are diversifying their search for funding, according to a new report.
The British Business Bank’s 2018 Small Business Finance Markets report reveals that while major banks are still the dominant channel for funding, the value of SME asset finance deals rose 12% in 2017 compared to 2016, while the value of peer-to-peer business jumped 51% over the same period.
Entrepreneurial activity in the UK remains strong, with a highest-ever population of 5.7 million companies at the start of 2017, including a record number of new businesses created at around 414,000.
The British Business Bank is the UK’s national economic development bank. It was established in 2014 to make finance markets for smaller businesses work more effectively.
It is currently supporting more than £4 billion of finance to more than 60,000 smaller businesses and participates in a further £6.6 billion of finance to mid-cap businesses.
However, there is low demand for external finance as cash balances rise.
Bank analysis finds that, over the past 10 quarters, only 1.7% of smaller businesses sought new loans, the lowest level since 2011, according to the SME Finance Monitor.
Less than half (43%) of SMEs were confident they would get a loan if they applied, even though most new loan applications (72%) are approved.
Another concern is that most SMEs (70%) would prefer to miss out on growth if it meant avoiding external debts.
Keith Morgan, British Business Bank CEO, said: “A core objective of the British Business Bank is to encourage greater diversity of finance, so we welcome the growth in the uptake of equity finance and other alternatives to traditional lending.
“It can’t be overstated how important it is to build a more complete funding ladder for economically important high-growth businesses.
“Scale-ups need more long-term patient capital throughout all stages of their development to be world-beating companies, and we look forward to using our new resources allocated at autumn Budget to unlock more of this type of capital.”
He said the British Business Bank is supporting the government’s industrial strategy and patient capital review by building business confidence and stimulating demand.
The report highlights that there would be benefit in improving the information available about finance options.
In response, the bank is introducing a new digital information hub for smaller businesses, to better enable them to seek the finance best suited to their needs.
Small business minister Andrew Griffiths said: “Small businesses are the backbone of our economy and this Government’s industrial strategy is building a Britain in which they can continue to thrive.
“Although challenges remain, more small businesses are accessing finance from a wider range of sources.
“The British Business Bank plays a vital role in this, which is why we are working with them to establish a new £2.5 billion Investment Fund to ensure small businesses can access the finance they need to succeed.”
Commenting on the report, Simon Goldie, head of asset finance at the Finance and Leasing Association, said: “The 12% growth in asset finance new business that went to SMEs in 2017 demonstrates that leasing and hire purchase are vital sources of funding for these businesses.
“Improving the growth and productivity of smaller businesses is critical to the economy, so we welcome the BBB’s plan to stimulate demand for funding by introducing a new digital information hub.
“The knowledge-gap in business funding has persisted for too long and continues to hamper firms in their search for the right finance product.”