Surge in Business Lending Signals Recovery, but Regional Disparities Persist

In a significant turnaround for small business financing, lending to companies across the UK surged by 21% in the first half of 2024, marking the first positive trend in small business loans and overdrafts since the pandemic. Data from a recent report reveals a notable increase in lending in the South East, which saw a 10% rise in 2023. However, other regions continue to face challenges, highlighting a patchy recovery in business finance.

Last year, the number of approved loans nationwide fell by 9%, with steep declines noted in areas such as the North East and Wales. The total value of loans approved across the country also saw an 18% decrease. In contrast, the South East bucked this trend, achieving a 21% increase in loan values, contributing to an overall boost in economic activity in the region.

The British Business Bank (BBB) observed that while lenders are exercising greater caution in approving loans, businesses in the South East have successfully accessed vital financing. Louis Taylor, CEO of the BBB, emphasized that the increase in bank financing for small businesses includes notable growth in credit cards, overdrafts, and asset financing, which have experienced an almost post-COVID boom.

Despite the strong performance in the South East, Taylor acknowledged the ongoing challenges for small businesses elsewhere in the UK. High interest rates and cautious lending practices have hampered borrowing, particularly in the North East, which experienced a staggering 24% drop in loan volume during the first half of 2024, adding to a 37% decrease the previous year. This region, which houses crucial sectors like manufacturing and agriculture, has been disproportionately affected by the slow recovery in lending.

The report also highlighted a growing reliance on credit cards by small business owners, who increasingly turn to this financing option to address short-term needs amid restricted access to traditional loans. Although the demand for bank loans remains subdued, there has been a noticeable shift towards alternative financing sources. In the past year, 59% of debt funding for small and medium-sized enterprises (SMEs) originated from new lenders, including Starling Bank and Funding Circle, moving away from traditional banks like Barclays and Lloyds.

However, this evolving financial landscape has led to increased complexity for businesses seeking external financing. “Companies will have multiple relationships for different things,” Taylor noted, stressing the importance of guiding SMEs through this new terrain. Despite these challenges, 72% of small businesses continue to operate without external finance, a slight decline from 77% in 2022. Confidence in borrowing remains low, with only 33% of businesses expressing willingness to secure funds for growth.

As the British Business Bank celebrates its tenth anniversary, it has secured long-term funding of £7.9 billion to support businesses navigating this changing financial environment. Chancellor Rachel Reeves announced the commitment, which includes key initiatives like the £660 million Northern Powerhouse Fund, aimed at bolstering businesses across the UK.

With the South East leading the recovery in small business lending, hopes are high that the BBB’s new funding structure will help bridge the financing gap and promote economic growth in underperforming regions. Taylor concluded, “We now have £7.9 billion of commercially focused capital that will continue to invest in our economy, supporting the growth of earlier-stage companies and regional development.”