Business funding and the Brexit effect

Date: 12 February 2019

Coins on stock chartOne in three smaller businesses expects access to finance to become more difficult after Brexit, according to a new report.

The British Business Bank's 2019 Small Business Finance Markets report has found that while some businesses expect an impact from Brexit, many remain optimistic about growth.

Even so, the data shows that an increasing proportion of smaller businesses expect Brexit to have a negative impact on their business (29%, up from 22% in 2017). More than one in three (34%) expect access to finance to become more difficult after departure, with only 3% expecting finding finance to become easier.

Overall, the demand for external finance has continued to fall, with just 36% of smaller businesses using external finance in 2018 (compared to 44% in 2012). Despite these concerns, however, 50% still aspire to grow over the next 12 months.

Evidence in the report also suggests a shift in behaviour amongst some smaller businesses. Some are delaying longer term investment and expansion decisions ahead of Brexit and reducing their demand for external finance, while others appear to be using external finance to put in place shorter term contingency plans.

"It is clear that a lack of confidence is affecting many smaller businesses, as evidenced by a continuing drop in demand for external finance," said Keith Morgan, British Business Bank ceo.

"It is, however, encouraging to see that half still aspire to grow and that there's increased awareness of a broader range of finance options. This will be an important factor in ensuring that smaller businesses are better placed to make the right finance choices as uncertainty diminishes and confidence returns."

The findings show that bank lending stock (£166bn) was similar to 2017 (£165bn) but this continues a decline in real terms over recent years. Gross bank lending - which makes up the biggest proportion of business finance - averaged £14.4bn per quarter. Repayments, however, were at virtually the same level - £14.3bn per quarter - meaning that net lending over the year was positive, but only by a small amount.

The growth of alternatives to bank finance has continued, albeit at a slower pace compared to 2017. Asset finance grew 3% in 2018, compared to 10% in 2017 and peer-to-peer business lending by 18%, compared to 51% growth in 2017.

The report has also found that there are big differences in the use of finance options between UK regions. EIS and SEIS deals, for example, are concentrated (47%) in London and the South East, and over half (57%) of business angels are located in London. Equity deals are concentrated in London and also in tech clusters, such as Manchester and Edinburgh.

The British Business Bank has introduced measures to address the issues identified in the report, including a £100m Regional Angels programme and the launch of an online Finance Hub.

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