The British Business Bank’s third annual Nations and Regions Tracker, finds the use of external finance among smaller businesses in Wales has fallen to 37%, down 13 percentage points from 50% in 2021.This was the largest year on year drop for all Nations and regions across the UK.
This downward trend is reflected across the rest of the UK, with all 12 Nations and regions seeing a decline in usage in 2022. This drop is largely driven by the progressive phasing out and repayment of pandemic support, as most Covid loan schemes, including those of the British Business Bank, closed in the first half of 2022.
Grants saw the largest annual fall in usage in both Wales and across the rest of the UK. In Wales, the share of smaller businesses using grants fell from 16% in 2021 to 9%, the largest year-on-year decline of any type of finance in Wales since pre-pandemic. This is partially attributed again to the end of Covid-related grant support.
Core debt products, including credit cards, bank loans and overdrafts, continued to be the most used forms of finance among smaller businesses in all UK nations and regions, with Wales reporting the highest usage of small business bank loans (15%) and leasing/hire purchase/vehicle finance (11%).
The use of loans from directors, friends or family grew from 2% to 5%.
On a UK wide level report data does indicate signs of recovery in the use of external finance in early 2023, returning to levels closer to that of 2021. Overall, 43% of smaller businesses in the UK were using external finance in the first half of 2023, with increased use of ‘traditional’ (ie non pandemic-related) finance sources at 38%.
This is mirrored by early signs indicating the decline in equity finance deals is beginning to ease across the UK in 2023, following almost universal decline in 2022. The Nations and Regions Tracker 2023 found that in 2022, the combined Nations and regions outside of London recorded their first year-on-year decline in the number of equity deals since Beauhurst’s data collection began in 2011 (-10%), with the total investment value in these areas also falling (-11%). Only the South West (+4%), Yorkshire and The Humber (+4%), and Wales (+19%) saw an increase in deal numbers compared to 2021, although investment value in Wales did fall by 10%.
Academic spinouts make a large contribution to equity activity in 33 innovation-led clusters – Swansea and Cardiff & Newport are home to two innovation-led clusters focused on medical technology
The Nations and Regions Tracker identified 33 innovation-led clusters covering 196 UK local authority districts, with each cluster marking a key driver of growth and technological progress for the UK. These clusters represent 93% of UK technology/IP related equity deals and 96% of total equity investment value from 2011 to Q2 2023.
University spinouts play a crucial role in supporting emerging innovation-led clusters. And while their large contribution to the success of clusters in the Golden Triangle (encompassing Cambridge, London and Oxford) is well known, it is as substantial in clusters located elsewhere in the UK. These include (among others) Greater Glasgow and Aberdeen, where spinouts represent 47% and 46% of deals; Swansea (45%); Belfast (37%); Coventry & Warwickshire (34%).
Welsh spinouts are predominantly specialised in medical technology, representing 63% of Technology/IP -related spinout deals in Swansea, but the cluster also has above-average representation of spinout deals relating to Materials technology (13%) and Clean technology (11%). Conversely, the usually dominant Life sciences sub-sector represents only 5% of spinout deals in Swansea.
Despite the relatively low local representation of research institutions, the Swansea cluster depends on academic spinouts for 45% of Technology/IP-related deals and 43% of investment value between 2011 and Q2 2023. All but one of these deals involved Swansea University.
In Cardiff & Newport, spinouts represent a lower, but still considerable, share of equity activity over the same period at 18% and 22%, in line with the corresponding UK averages.
Data shows that Welsh clusters have the smallest average deal values for first-time equity investments of any UK cluster, with spinouts also taking longer to secure their first announced deal than their counterparts based in the Golden Triangle.
Spinout deal activity in the Welsh clusters also has much greater reliance on government investors than any other UK cluster group. Evidence shows that government investment can be a catalyst for developing thriving academic spinout finance ecosystems in all clusters, including in Wales.
Louis Taylor, Chief Executive Officer, British Business Bank, said:
“We are seeing promising signs that the use of external finance among smaller businesses is recovering after a decline in 2022. Unsurprisingly, our world-class universities continue to play a crucial role in this, supporting emerging innovation-led clusters across the UK”
Susan Nightingale, Director, UK Network, Devolved nations at the British Business Bank, said:
“The Bank’s report paints a mixed economic picture for Wales, with both positives and negatives to consider. While the use of external finance has dropped significantly in Wales, this can largely be explained by the closure of Covid loan schemes in 2022, however, it’s encouraging to see early signs of recovery on a UK level in 2023 with usage of external finance picking up during the first part of the year and we hope to see this mirrored in Wales as the economic picture becomes clearer.
“A key takeaway from the report is the success of academic spinouts in Swansea and Cardiff & Newport, which are supporting emerging innovation-led clusters, particularly in the medical technology sector in Swansea. This activity is of vital importance to the Welsh economy and should continue to be nurtured to ensure growth.”
British Business Bank driving access to finance across UK
The British Business Bank is driving sustainable growth and backing innovation across the UK by ensuring smaller businesses have access to capital. The British Business Bank is launching six new Nations and Regions Investment Funds, including a £130 million investment fund for Wales which will launch this autumn, aimed at driving the growth of small and medium-sized businesses in Wales.
When deployed, the new Investment Fund for Wales will further strengthen the Bank’s ability to support smaller businesses in less-developed ecosystems access the finance they need to grow, working in synergy with other UK-wide Bank programmes.