British Business Bank

Record levels of SMEs sought external financial support in 2020, reveals British Business Bank

Almost half of SMEs (45%) applied for external financial support in 2020, compared to just 13% in 2019, according the latest data from British Business Bank.

Its Small Business Finance Markets 2020/21 report found that gross bank lending (excluding overdrafts) to smaller businesses rose to £104bn in 2020, 82% higher than in 2019, driven by the use of government loan schemes.

Nine in ten (89%) of businesses seeking finance in the past year did so because of the impact of Covid-19, with 75% of these SMEs seeking support to help with cashflow. 

Encouragingly, 8% sought finance, at least in part, to pivot or change their business model, and 7% to invest in the digital capability of their business.

The data also showed that, across both BBLS and CBILS, 59% of SMEs accessing government-backed finance schemes have borrowed more than 20% of their reported turnover.

However, a significant proportion of finance facilities taken out because of Covid-19 remained unspent by Q3 2020.

According to the report, only 23% of SMEs had spent all of their facilities, with 19% reporting they had not spent any.

Turnover decline rates for businesses of all sizes were over three times their respective prior five-year average, illustrating the scale of disruption across all businesses. 

The smallest SMEs experienced the largest fall in turnover — in Q3, 49% of zero-employee firms reported a fall in turnover over the previous 12 months, compared to 38% of businesses with 50-249 employees.

The report suggests there could be significant further demand for funding throughout 2021 as businesses seek to move on from the pandemic and pivot towards growth, adapt to life outside of the EU, improve productivity and transition to a new net zero economy.

Despite this prediction, in the fourth quarter of 2020, 37% of smaller businesses expected to stay the same size over the next 12 months, 33% expected to shrink and 4% to sell or close. 

Small- (10-49 employees) and medium- (50-249 employees) sized businesses were most likely to expect to grow (35% and 38% respectively). 

SMEs in business services (25%) and production (23%) sectors were the most optimistic about their prospects for development over the next year, with businesses in construction and other services sectors least optimistic (both 17%).

Overall, the report finds that record cash balances on the one hand and increasing debt levels on the other indicate that there are both a sizeable number of smaller businesses in a position to borrow further in 2021 and a large number likely to struggle with debt repayments. 

However, high levels of debt, and in particular the number of businesses with higher-debt-to-turnover ratios, suggests a potential drag on viable applications for finance in 2021.

Catherine Lewis La Torre, CEO at British Business Bank, said: “This has been an especially challenging period for smaller businesses, with external finance playing a vital role in business survival in the face of the Covid-19 pandemic. 

“The British Business Bank has played an important role during the crisis and we will continue to support smaller businesses as they steer a path towards a sustainable recovery.”

Chirag Shah, CEO at Nucleus Commercial Finance, commented: "Over the past 12 months, we have seen fintech and alternative lenders move into the mainstream due to their ability to provide SMEs with funds quickly and, as a result, more businesses now turn to our industry as their first point of call.

"The impact of Covid-19 on SMEs will be long lasting, so we need to see continued innovation across the industry to provide creative solutions which suit business’s individual needs. 

“We firmly believe fintech lenders are best positioned in the industry to support SMEs thanks to the ability to design flexible products, powered by cutting-edge technology. 

“Future innovation will further reinforce that fintechs can no longer be considered an alternative; we are the true mainstream lender.”

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