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Challenger and Specialist Banks Overtook Major Bank Lending in 2022; Reveals British Business Bank

Challenger and specialist banks’ lending total exceeded that of the UK’s major banks in 2022, giving them a 55 per cent share of the market. Challenger and specialist bank lending reaching £35.5billion, and more, is revealed in the most recent British Business Bank report.

The Small Business Finance Markets 2022/23 report finds that gross bank lending increased by 12.8 per cent in 2022. However, net lending actually fell by £8.5billion – in large part reflecting repayment of covid loans.

The report details how the smaller business asset finance market reached a record level in 2022. The market saw an increase in new business of 11 per cent across the year, reaching £22.1billion.

The data also highlights a drop in the demand for external finance. Q3 2022 saw 33 per cent of smaller businesses using external finance – compared to 44 per cent the year prior.

Gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures. In addition, survey findings show that success rates for those seeking loans fell sharply from 80 per cent to 64 per cent year-on-year.

Growing environmental awareness across the board

The British Business Bank report also highlights how equity finance markets are currently adapting to meet growing demand for investment in green innovation. Net zero deals also outperformed the wider equity market.

Net zero deals currently make up 12 per cent of all smaller business equity deals – compared to just five per cent in 2018. Notably, the investment value of net zero-related deals rose by 184 per cent over 2022. This saw these deals reach a new record level of £1.7billion.

Thirty-six per cent of all UK net zero-related deals take place in London. The British Business Bank has its own ambitions to support smaller businesses’ transition to net zero. It looks to enable more entrepreneurs and business owners to contribute to the goal of a net zero economy by 2050.

The financial barriers to innovation

The report notes that the UK is ranked second in the G7 for its innovation environment by the Global Innovation Index. However, the UK ranks fifth in the G7 nations regarding the proportion of its smaller businesses that are innovative. As per the report, the UK would require around 440,000 more innovative smaller businesses to meet the G7 average.

The report explains the importance of innovation to encourage economic growth during a challenging time for the country’s economy.

Innovative businesses are more likely to use external finance – 65 per cent compared to 58 per cent of non-innovators. While many of these smaller businesses seek finance to innovate, the availability of finance (nine per cent) and the cost of finance (eight per cent) were identified as significant barriers to innovation.

Currently, of those that are seeking finance – grant finance, asset finance or bank overdrafts were the options most picked to help develop innovative products and processes.

Louis Taylor British business bank
Louis Taylor, CEO of the British Business Bank

Louis Taylor, CEO of the British Business Bank, said: “Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options. There are promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance. At the British Business Bank, we are supporting these businesses as they achieve sustainable growth. In turn, this will boost economic productivity, by improving access to external finance.”


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