The British Business Bank’s Small Business Finance Markets 2023/24 report, published today, reports that Wales saw a 14% fall in announced equity deal numbers and a 49% fall in investment value taking the total to £94.2m.

This decline mirrors the UK as a whole where equity investment has declined to 2020 levels. Smaller businesses raised £6.5bn of equity finance over the first three quarters of 2023, 53% less than during the same period in 2022. After two exceptional years, this brings such investment to around the level it was in 2020, still the fourth-highest year on record.

Looking at trends in smaller business equity finance, London remains the region with the highest number of deals, though its share of UK deals fell from 52% in 2022 to 46% in 2023. The capital’s share of investment remained almost flat at 58% in 2023, compared to 60% the year before. On an annual basis the number of deals in Q1-Q3 2023 increased in only two UK regions, the East Midlands and the West Midlands, with the former being the only region to experience an increase in both deal numbers and deal value.

Smaller business use of finance increases in 2023

The use of external finance by smaller businesses saw a consistent rise over the year, growing from 41% in Q1 to 50% in Q3 in 2023. The rate of this increase indicates a growing need for finance to support cash flows, with a greater reliance on credit card (up 8% points) and overdraft finance (up 6% points). In Wales, overdraft use increased by 5% points between Q1 and Q2 2023, higher than the 2% point national increase. Working capital was the main reason for seeking finance for 58% of smaller businesses in 2023, up from 53% the year before.

Challenger and specialist banks up

For the third consecutive year, challenger and specialist banks account for a higher share (59%) of total gross lending than the big five banks (41%).

The lending landscape has changed considerably since 2014, with the British Business Bank report revealing that 60 new banking licences have been granted in the last decade, with 36 being issued to providers serving smaller businesses.

Several of these banks, including Starling and Monzo, have established significant bases in south Wales in recent years, joining an established FinTech community, with the region becoming well known as a hub for challenger bank activity.

Non-bank lenders have addressed specific, underserved segments of the market with growth in lending from private debt funds, peer-to-peer lending and invoice and asset-based finance.

Greater use of digital technology and AI will shape access to finance

Developments in AI are continuing at a rapid pace, and these advances will have a profound impact on small business finance markets in the coming years. The British Business Bank reports a steady increase in usage over the past decade, with most UK financial organisations now using predictive AI. More than 70% of UK Finance members surveyed have generative AI at the proof of concept or pilot phase, with FinTech and new entrants leading the way.

Finance markets will be key in the transition to net zero

Finance markets have a critical role in funding innovation and the adoption of new cleaner technologies. The transition required to meet the UK’s net zero objectives will require significant investment across all areas of the economy. The Government’s Green Finance Strategy estimated that an additional £50bn-£60bn of capital investment per year will be required through the late 2020s and 2030s to meet the UK’s net zero commitments, with private sector investment forming the majority of this. If the UK is to meet its net zero targets by 2050, smaller businesses must be part of the solution but they face many challenges in this transition. This includes access to finance, which is a major block for 28% of the smaller businesses prioritising environmental sustainability over the next 12 months.

Susan Nightingale, Director, UKN Network, Devolved Nations at the British Business Bank, said:

“The findings from the report reveal a significant decline in smaller business equity investment activity. Following record levels of activity in 2021, the middle of 2022 marked a clear turning point in the market and the most recent data has confirmed the continuation of this downward trend through 2023.

“In Wales equity deal numbers and investment values are tracking more strongly against the national average than many other nations and regions, but regardless it’s clear that the data is going in the wrong direction. However, the recent launch of the Bank’s £130m Investment Fund for Wales will go a long way to help address this. The Fund has been designed to drive sustainable economic growth by providing a range of commercial finance options with smaller loans from £25,000 to £100,000, debt finance from £100,000 to £2 million and equity investment up to £5 million. Deals have already begun to complete and the fund is working hard to ensure it is distributed swiftly and effectively to those businesses in Wales who have growth ambitions.”