The British Business Bank’s Small Business Finance Markets 2024/25 report, published today, finds that challenger and specialist banks’ share of gross lending is the highest on record - accounting for 60% and outperforming the UK’s big five banks.

The report also finds that business investment by smaller businesses continued to be low, a key reason for the lag in UK productivity versus other G7 countries.

Challenger and specialist banks continue to outperform the bigger traditional banks

Of the £62.1bn of gross lending to smaller businesses in 2024, £37.3bn was provided by challenger and specialist banks. Their share of gross lending (60%) exceeded that of the big five UK banks for the fourth year in a row, up from 59% in 2023 and the highest on record.

Business investment by smaller businesses remains low

The proportion of smaller businesses accessing finance fell from 50% in Q3 of 2023 to 43% in Q2 of 2024, most likely due to business confidence remaining low despite some recent economic growth. This reflects a challenging economic environment in the UK – 2024 saw growth in the UK at 0.9%, but GDP level was only 3.2% above the pre-pandemic level in 2019 (the second lowest in the G7).

The report also finds that smaller businesses generally invest less than larger businesses relative to their turnover. In 2024, smaller businesses invested an estimated £12.3bn, while larger businesses invested 2.25 times as much (£27.7bn), despite larger businesses contributing slightly less turnover to the economy (48%) than smaller businesses (52%).

Reasons for this lower level of investment include a general lack of capital, and investors having less information and certainty about smaller businesses, which leads to higher borrowing costs.

Investment in the UK has also been low historically, with investment growth slower post-global financial crisis. This is a key reason for the country’s productivity lag compared to, for example, Germany and France.

High cost of credit and risk aversion are key factors behind the lack of investment for smaller businesses

The report finds that smaller businesses who believed they have underinvested most commonly cited ‘credit being too expensive’ (58%), or that they ‘could not borrow at a reasonable rate’ (55%) as key factors for not investing in their business.

77% agreed that they would accept a slower growth rate rather than borrowing to grow, with only 7% disagreeing, suggesting a strong aversion to taking on debt for investment.

Louis Taylor, CEO, British Business Bank, said: “It is clear that conditions are not easy for smaller businesses, with some domestic uncertainty meaning many were less willing to invest with confidence in 2024.

“If we are to achieve the growth we all want in the UK economy, it is important that we continue to make the case for business investment which can help drive economic growth, lift wages and improve living standards.

“The diversity of supply of finance, in terms of both product and provider, is an important factor in meeting the diverse needs of the UK’s highly varied smaller business community. The increasing role for challenger banks in 2024 is an encouraging sign, as is the continued rise of asset finance.

“The findings from this report further emphasise the need to ensure smaller businesses across the UK’s Nations and regions have better access to the finance they need to invest. We will continue to support UK economic growth by helping them find the capital they need to start up, scale up and stay in the country as they realise their full potential.”

Credit cards and overdrafts remain the most common forms of finance for smaller businesses

Credit card financing continued to be the most popular finance type in 2024, although usage declined slightly from 15% of smaller businesses in Q1 to 13% in Q3.

Bank overdrafts were the second most popular form of finance for much of this period, also experiencing a decline in usage throughout 2024, falling from 14% in Q1 to 9% in Q3. More broadly, these changes over the course of the year indicate a gradual shift away from short-term, higher-interest products.

Smaller businesses are increasingly focused on environmental sustainability as a priority, and are beginning to consider using external finance to fund this

Over half (53%) of smaller businesses are prioritising environmental sustainability over the next year. This marks an increase from last year’s figure (50%) and is significantly higher than in 2022 (46%).

The report found that over two thirds (71%) of smaller businesses have already undertaken at least one action to become more environmentally sustainable, but that 88% funded these measures using internal sources of funding.

For those planning to undertake energy efficiency and environmentally sustainable measures in the next two years, a greater share of small businesses plan to use external sources of finance including loans & finance agreements (16%), grants (21%), as well as credit cards and overdrafts (9%).

Equity investment in 2024 is similar to both 2019 and 2020 levels, with deal numbers down in Q1-Q3 compared to 2023

Equity investment in 2024 was similar to both 2019 and 2020 levels, prior to the significant increase in activity that began during the pandemic. It is now clear that 2021 and 2022 were outlier years for the UK market, during which £20.3bn and £17.0bn of equity investment was deployed respectively.

The number of smaller business equity deals in the first three quarters of 2024 fell 24% compared to the first three quarters of 2023. Despite this, the value of deals showed a year-on-year increase of 7% for the same period.

Exits from venture capital-backed businesses showed some recovery in 2024, however, with £10.4bn of total value from exits. This represented a 100% increase on 2023 (£5.2bn), driven by a strong second half of the year, and was due to an increase in the valuations of the individual businesses, with the number of exits remaining largely the same (215 in 2024 versus 211 in 2023). This suggests early signs of an upturn in this area of the market.

Ethnic Minority-led businesses as a whole indicate difficulties in accessing finance, with Black entrepreneurs particularly affected

The report finds that business owners from a Black, Asian or Other Ethnic Minority background are more willing to use external finance (45%) than their White counterparts (31%).

However, 43% of Ethnic Minority-led businesses cited ‘difficulties getting finance’ to help them grow. Furthermore, the report highlighted that business leaders identifying as Black have found it more difficult to access external finance, with 59% of Black entrepreneurs agreeing it would be difficult for them to get finance.