Trends and themes in the funding landscape
The funding landscape has changed beyond recognition in the past fifteen years. Challenging economic conditions and rapid technological change have driven adaptation and innovation from lenders and brokers alike. In this summary of recent research reports from UK Finance, the British Business Bank and the NACFB, we pick out the themes and trends shaping the finance industry today.
Smaller business finance markets have substantially evolved since the crash of 2008. At that time, business lending was traditionally dominated by major banks, but their risk-averse lending in the immediate aftermath of the financial crash created an opportunity for new entrants. There are now a greater range of finance providers than ever before, whilst new products have been deployed to meet the demands of modern business profiles and appetites. Despite this, issues remain in the availability of finance for specific sectors and business categories.
We’ve summarised the key findings from keystone research from three significant finance bodies, to help brokers and businesses keep on top of the trends shaping smaller business finance provision.
UK Finance’s Business Finance Review
About the research:
UK Finance provides a regular analysis of how the finance needs of small and medium-sized enterprises (SMEs) are being supported through lending from mainstream lenders and specialised finance providers and looks at their deposit holdings. Published in March 2024, the latest Business Finance Review provides a round-up of lending activity to SMEs in the fourth quarter of 2023 and the year as a whole.
Key findings:
Business confidence is still fragile, causing unstable demand patterns: “From a business lending perspective, the post-pandemic period has been characterised by an uncertain demand environment, the overhang of Covid-19 government loan schemes and rising interest rates. All of which have combined to depress SMEs’ demand for new and additional finance.”
Lending to SMEs has fallen. Gross lending to SMEs dropped 22% to £14.3 billion in 2023 from £18.4 billion in 2022. UK Finance blame “demand uncertainty, higher interest rates and the impact of lending taken out during the pandemic” for the weakness last year. They found that 59% of SME lending now comes from outside the big banks.
2023 was a game of two halves: The year started on a particularly weak note with financial market turmoil at the end of 2022 reducing loan applications, but the picture appeared to stabilise as the year progressed.
Sector differences emerged in H2 2023: “…our data also point to greater sector variation in lending patterns. Manufacturing and agriculture, for example, reported two consecutive quarters of increase in gross lending in 2023 Q3 and Q4, with only real estate and construction continuing to see falls in lending throughout the second half of last year.”
SME cash deposits are reducing: “While SMEs use of overdraft facilities, in aggregate, remained broadly stable over the quarter, the stock of deposits continued to trend down. The drop in Q4, at 1.6 per cent, represented something of a slowdown in the pace of decumulation compared with the previous quarter (a decline of 4.5 per cent).”
An outlook of cautious optimism: “Our Q4 data contain some of the most promising signs we’ve seen for more than a year that SMEs are starting to plan for the future and have a bit more confidence to take on new or additional finance, and lenders are meeting those requirements.”
Link to the full research:
Business Finance Review Q4 2023
NACFB – Pathways to Prosperity
About the research:
The National Association of Commercial Finance Brokers (NACFB)’s annual lender and broker survey represents a comprehensive effort to map trends in intermediary-led lending over the prior year. With results unveiled in March 2004, this survey ran from November 2023 and canvassed the opinions of commercial finance brokerages and lenders.
Key findings:
Broker-lender dynamics are changing. The report revealed a decrease in the average number of lenders on a NACFB Member’s panel to 96, down from 106 in 2020, a 9% drop over three years. Conversely, NACFB Patron lenders expanded their connections, maintaining an average panel of 893 brokers and introducers (and an active panel of 227) in 2023. 53% of lenders noted an increase compared to the previous year.
As some lenders lose appetite, others come to the fore. Brokers are working hard to find the right funding partners. 52% of Member brokers observed a decrease in lending appetite across all types of lender last year, with just 14% noting an increase and 35% seeing no change. Nearly half of those who highlighted decreased appetites sought alternative lenders in response. Remarkably, only 5% of brokers reported a reduction in their lending volume due to the fluctuating lender appetites, highlighting the vital role brokers play in finding capital for clients.
Growth ambitions driving borrowing. The NACFB report that 87% of SME borrowing in 2023 was identified as being motivated by growth ambitions – marking a slight dip from 92% in 2022. The primary motivations for seeking finance included acquiring property/assets, business expansion, enhancing operational efficiency, innovation in products/services, and support for overseas trading. Although not based on direct responses from the SME borrower themselves, these findings offer suggest lenders perceive a strong inclination towards proactive financial planning over distressed borrowing.
Link to the full research:
British Business Bank – Small Business Finance Markets Report 2024
About the research:
In the tenth annual Small Business Finance Markets report, the British Business Bank assesses how small business finance markets have developed over the last decade (2014-2023) as well as assessing more recent trends.
Key findings:
Bank lending and equity finance funding reduced in 2023. Bank lending and equity finance for smaller businesses fell in 2023, reflecting the challenging economic conditions, it is encouraging to see asset finance has grown 7% in 2023, a third consecutive annual increase.
Alternative finance integral in democratising access to finance: Alternative finance providers, which includes provider of asset finance, invoice finance, term loans, cashflow loans, venture debt and private debt, greatly increased their share of lending to smaller businesses. According to British Business Bank report, “This has been achieved not only by attracting businesses traditionally served by high street banks but also by being able to offer services to viable businesses that were previously unable to access funding at all.” Indeed, most alternative finance providers do not compete with the traditional banks but complement their offerings. As such they have not only increased the options available to smaller businesses but have also increased the accessibility and appropriateness of finance available.
Brokers play key role in access to finance. The report references an NACFB metric that 32% of new clients successfully funded by its members had been previously denied funding elsewhere – a 3% increase from 2022.
Open banking and partnerships continue to improve smaller business funding options. In recent years non-bank lenders have been exploring partnerships and open banking to improve their smaller business offerings and this theme continued in 2023.
Link to the full research:
Small Business Finance Markets Report 2024
