Small businesses in the south east of England are benefiting from a strong recovery in bank lending, leaving the rest of the UK lagging behind, according to new research from the British Business Bank.
Business lending in the region rose by 21% on approved loans and overdrafts in the UK in the first half of the year, marking the first positive move in small business finance since the start of the pandemic.
Figures from the report reveal that while lending in the South East is set to increase by 10% by 2023, other regions of the UK are still struggling. Last year, the number of approved loans fell by 9% across the country, with the biggest declines in areas such as the North East and Wales. In addition, the total number of approved loans fell by 18% across the country, although the South East bucked the trend, recording a 21% increase in loan values.
Patch recovery for all regions
The uneven recovery in lending highlights the growing divide between the south east and other parts of the UK. The British Business Bank noted that although lenders have shown greater caution regarding loan approvals, businesses in the South East have been able to access much-needed capital, helping to boost economic activity in the region.
Louis Taylor, chief executive of the British Business Bank, said: “At the same rate as the provision of bank finance to small businesses, the biggest growth in credit cards, overdrafts and, and leases. [asset finance]which has seen an increase almost post-Covid. “
Despite strong performance in the South East, Taylor acknowledged the wider challenges facing small businesses across the UK. High interest rates and cautious lending have curbed lending in other regions, with the North East experiencing a 24% drop in loan volume in the first half of 2024, including a 37% fall last year. The North East, which is home to key industries such as manufacturing and agriculture, has been hit hard by the slow rise in lending.
Credit card trust and careful confidence
The British Business Bank report also revealed a significant increase in the use of credit cards by small businesses, many turning to this type of financing to meet short-term needs or to close the gap in their access to credit. Taylor noted that the reasons behind this trend are unclear but can be linked to limited access to other forms of finance.
Although the need for bank loans has been reduced, businesses across the UK are increasingly exploring alternative sources of finance. Last year, 59% of small and medium-sized enterprise (SME) loan funding came from new lenders such as Starling Bank, Funding Circle, and Thin Cats, marking a shift away from traditional banks such as Barclays, NatWest, and Lloyds. in SME lending over the past decade.
However, businesses are finding that the external financial environment is very complex. “Companies will have a lot of relationships for different things,” Taylor explained. “They will have exchange relations with banks, some will do things like foreign currency. It is a very difficult picture for SMEs, and we are doing everything we can to guide them.”
Despite this, the majority of small businesses (72%) continue to operate without foreign capital, a slight decrease from 77% in 2022. Confidence in using external capital remains low, with only 33% of businesses expressing confidence in borrowing to finance growth.
Government support and long-term financing
The British Business Bank, established in 2014 to diversify access to finance for small businesses, has played a key role in helping businesses cope with the evolving financial environment. As it celebrates its 10th anniversary, the bank has received permanent funding of approximately $7.9 billion in equity and debt financing, following an announcement by Chancellor Rachel Reeves.
This long-term commitment includes significant funds such as the £660 million Northern Powerhouse Fund, which is co-invested with private sector partners to support businesses across the UK. In the year to March 2024, the fund invested £246 million in more than 200 companies.
Louis Taylor hailed the decision as a “significant moment,” explaining that the new structure allows the bank to reinvest money instead of returning it to the Treasury. He said this change enables the bank to be more flexible in the way it allocates funds and positions it to be a more reliable investor in high-quality companies.
“We now have £7.9 billion of trade-focused capital with a consistent appetite for risk over the economic cycle. We will continue to write checks [venture] funds to strengthen themselves and encourage others, without violating our underwriting standards,” added Taylor.
As the South East continues to lead the way in lending to small businesses, other regions of the UK are hoping for more support to close the funding gap. With new long-term funding from the Bank of England and a commitment to financial diversification, there are hopes that regional disparities in lending may begin to narrow, supporting economic growth across the country.