The British Business Bank’s Small Business Finance Markets 2020/21 report has been published and highlights a surge in applications for external financial support. This includes government and local grants, among SME’s, with almost half (45%) surveyed saying they applied for external financial support in 2020, compared to 13% in 2019. At the same time, gross bank lending (excluding overdrafts) to smaller businesses rose to £104bn in 2020, 82% higher than in 2019, driven by the use of the government loan schemes.
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 the EU, improve productivity and transition to a new net-zero economy.
Catherine Lewis La Torre, CEO of 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.”
Surge in use of government-backed loans
Businesses shifted away from most traditional forms of external finance to utilise government-backed finance schemes and support.
Reflecting this, the utilisation of bank overdrafts, credit cards and asset finance all fell, while the only increase in the usage of traditional repayable external finance was seen in loans, up from around 10% in previous years to 25% in 2020. This is reflected in BBLS and CBILS lending data, which showed around 1.5m facilities approved by the end of 2020. The use of government grant funding by businesses also increased significantly, from 2% in 2019 to 31% in 2020.
Both cash balances and debt have risen
The majority of sectors saw between 20% and 30% of their SME population take up a loan during the pandemic, and British Business Bank data shows that across both BBLS and CBILS, the majority (59%) of SMEs accessing government-backed finance schemes have borrowed more than 20% of their reported turnover.
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 have experienced the largest declines 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 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 sizeable number likely to struggle with debt repayments. 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.
Moving towards recovery
In the 4th quarter of 2020, more than a third, (37%) of smaller businesses expected to stay the same size over the next 12 months, 33% expected to shrink, and 4% to sell or to close. Only one in five (21%) were expecting to grow, compared to 28% the previous year. Small (10-49 employees) and medium (50-249 employees) sized businesses were most likely to expect to grow (35% and 38% respectively) compared to 21% overall. SMEs in business services (25%) and production (23%) sectors were most optimistic about their prospects for growth over the next year, with businesses in construction and other services sectors least optimistic (both 17%).
The report suggests there could be significant further demand for funding in 2021, as businesses continue to recover from the effects of the pandemic. There are positive indicators that banks currently look to have sufficient capital and could support further lending. Due to the dominance of government emergency schemes, non-bank and alternative finance lenders have been less active in 2020 and seen lower demand for their products. The previous five years to 2020 saw significant growth in alternative finance flows to smaller businesses, and these lenders expect activity to resume when demand returns.