Challenger and specialist banks have surpassed high street banks for smaller business lending, with new data showing they accounted for 55% of the SME market in 2022.
According to the state-owned British Business Bank, challenger and specialist banks provided a record £35.5bn compared to the £29.6bn deployed by traditional UK banks.
“Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options,” said Louis Taylor, CEO of British Business Bank.
Last year smaller businesses relied less on outside finance, with usage shrinking by 11%, the report found. However, larger average loans pushed gross lending up by 12.8%.
Challenging funding enviornment
The challenger bank lending findings come amid a difficult funding environment for startups and SMEs. In the third quarter of 2022, just 33% of smaller businesses were using external finance compared to 44% the year prior.
The impact of rising inflation and increased due diligence was also evident, with the British Business Bank’s survey showing that the success rate for business loans fell from 80% in 2021 to 64% in 2022.
The report added that smaller business equity finance levels “slowed considerably” from the third quarter of 2022.
Taylor added: “Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance.”
However, equity investments for green and net zero tech startups outperformed the wider market. The report showed that the value of net zero-related investments rose by 184% over the past year, reaching a record £1.7bn.
“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,” said Taylor.
Meanwhile, the smaller business asset finance market rose 11% in 2022, up from £22.1bn in the year before.
At the start of the year, the British Business Bank unveiled a new £150m investment fund targeting Scottish SMEs and is set to launch a Welsh fund later this year.
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