Use of external finance falls across the UK

The British Business Bank’s second annual Nations and Regions Tracker finds usage of external finance has fallen overall across the UK, as nine out of the 12 regions saw a drop in use of small business finance. In addition, 38% of smaller businesses were using external finance in the second quarter of 2022, down seven percentage points from 45% a year earlier. Core debt products remain the most used and widely available across the UK nations and regions.

Equity finance fuels the UK’s nations and regions

Seed stage equity investment, which is key to building the pipeline of investable opportunities to drive larger quantities of venture and growth capital investment in the future, increased by 88% outside of London in 2021, whereas in London it fell by 22%.

However, London’s dominance of equity finance markets continued in 2021, with 1,286 deals worth £11.9bn taking place, representing 66% of investment and 49% of deals in the UK. This was driven by stronger growth in London compared to the rest of the UK, rather than a decline in the other UK nations and regions. Every nation and regions outside London, except the West Midlands, saw increased small business equity investment in 2021 compared to 2020.

Q2 2022 data suggests that, despite global economic conditions, equity investment in the UK held up in both number of deals and investment value in the first half of the year.

Investment in net zero sectors has grown faster than overall UK equity markets

The Nations and Regions Tracker found that equity investment in net zero sectors has grown at an even faster rate than overall UK equity markets. This growth has occurred across the UK’s nations and regions, with 69% of deals and 67% of investment taking place outside of London between 2011 and H1 2022Since 2011, £6.9bn of equity investment has gone into net zero-aligned UK smaller businesses across 1,307 deals. In the first half of 2022, £2.7bn was invested across 165 deals in smaller businesses in net zero sectors, representing 22% of investment and 12% of deals during the period.

The Nations and Regions Tracker found that equity investment in net zero sectors such as clean tech, electric vehicles, meat substitutes and smart energy, has grown at a faster rate than overall UK equity markets in recent years. The share of deals which are in net zero sectors has grown every year since 2018 rising from 5% in 2018 to 12% in first half of 2022.

These equity finance flows have the potential to form new clusters around net zero innovation in several nations and regions of the UK, including: Warwickshire, Oxfordshire, Cheshire East, Sheffield, Edinburgh, Glasgow, and Bristol.

Businesses in the most deprived areas show greater ambition for growth

The Nations and Regions Tracker found that businesses in the most deprived areas of the UK are more open to using finance and report higher levels of ambition for growth. Nearly half (49%) of businesses in the most deprived areas have a long-term ambition to be a significantly larger business, compared to 40% elsewhere. They are also more willing to use external finance to grow (36%) than businesses in less deprived areas (33%).

The report also showed that businesses from the most deprived areas are less inclined to apply for finance, however, and in addition are more likely to be turned down. A quarter (26%) of businesses in need of finance did not apply compared to 22% elsewhere and in 2019 (pre-Covid), nearly half of businesses (43%) from highly deprived areas that applied for finance were turned down, compared to 25% of those from elsewhere.

Despite rejection rates in 2020 being much lower, driven by the Covid-19 loan guarantee schemes, the gap persisted. In 2020-2021, 16% of businesses from deprived areas were turned down for finance, compared to 11% elsewhere.

Shanika Amarasekara, Chief Impact Officer, British Business Bank said: “We are seeing promising signs of growth in equity finance markets outside of London and data suggests equity investment in the UK held up in the first half of the year. While equity investment slowed in recent months, it is encouraging that net zero-related investments appear to be growing.

For a sustainable and prosperous UK economy to continue to grow, businesses across the UK need to thrive. We want to break down particular barriers to finance so that access to finance is a level playing field for all entrepreneurs – wherever they are, whatever their gender, whatever their ethnicity. While businesses in highly deprived areas are more open to using finance, and report higher ambition levels, more must be done to reduce regional inequalities in access to finance.”

British Business Bank improving access-to-finance conditions for businesses in the UK’s most deprived areas

Start Up Loans and the Bank’s three regional investment funds have a strong track record in providing finance to deprived areas. A higher proportion of Start Up Loans and regional funds recipients are based in deprived areas of the UK than the wider business population.

 The Nations and Regions Tracker finds that the Bank’s regional investment funds continue to be pivotal in helping smaller businesses in harder to reach areas access finance. Since launching, the Bank has invested more than £540m into the Northern Powerhouse Investment Fund, Midlands Engine Investment Fund, Cornwall & Isles of Scilly Investment Fund, and the Northern Ireland Growth Finance Fund. This crowded in more than £825m in additional private sector co-investment and has supported more than 1,650 smaller businesses.

The Bank will launch a series of new Nations and Regions Investment Funds which will deliver a £1.6bn commitment of new funding to drive sustainable economic growth. The new funds will increase the supply and diversity of early-stage finance for UK smaller businesses, providing finance to firms that might otherwise not receive investment. As part of this new programme, the Bank will be establishing investment funds in each of the Devolved Nations and the South West for the first time.