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Promising Growth Signs in Welsh Small Business Finance Markets

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The British Business Bank’s second annual Nations and Regions Tracker, finds promising growth signs for Wales’ small business finance markets.

Wales one of only three UK regions to buck trend of falling usage of external finance.

The use of external finance by smaller businesses across the UK has fallen in the last year. 40% of UK smaller businesses were using external finance in the four quarters to Q2 2022, down from 42% a year earlier. Usage fell in nine of the 12 UK regions and nations between Q2 2021 and Q2 2022.

However, three UK areas including Wales, East of England and the North West bucked the trend, with 47% of Wales smaller businesses utilising external finance in both Q2 2021 and Q2 2022.  Wales had the highest use of external finance across the UK in Q2 2022.

In the first half of 2022 the report outlines that there have been 35 reported equity deals in Wales, with an investment value of just over £39m compared to £25m in the same period last year.  Whilst current poor global economic conditions may impact the remainder of the year, overall venture capital investment in Wales in 2022 could be largely in line with 2021 levels.

In early-stage equity finance, the pace of growth in investment in the regions and nations outside of London in 2021 was much stronger than in the capital.

Seed stage investment, which is key to building the pipeline of investable opportunities to drive larger quantities of later stage capital investment in the future, increased by 88% in value outside of London in 2021, whereas in London it fell by 22%.

However, London, the South East and East of England continued to attract a much higher proportion of equity finance flows than their share of the UK’s high growth business population. Although every region and nation outside of London, except the West Midlands, saw increased equity investment in 2021 compared to 2020.

Businesses in the most deprived areas face greater challenges in accessing external finance despite having a greater appetite for it

The Nations and Regions Tracker found that businesses in the most deprived areas[1] of the UK are more open to using finance and report higher levels of ambition for growth, whilst facing greater challenges in accessing external finance.

Nearly half (49%) of businesses in the most deprived areas have a long-term ambition to be a significantly larger business, compared to 40% elsewhere.  They are also more willing to use external finance to grow (36%) than businesses in less deprived areas (33%).

However, the report found that the growth ambitions of smaller businesses in the UK’s most deprived areas are being stifled because of a lack of access to finance. Just over 14 per cent of firms in Wales[2] are based in the most deprived areas of England and Wales, making them more likely to face barriers to growth.

A quarter (26%) of smaller businesses in need of finance in deprived locations did not apply for finance. Of those who did apply between 2020-21, 16% were turned down compared to just 11% elsewhere.

New data underlines the Bank’s commitment to rolling out the launch of the £130m Wales Fund in spring 2023

Alongside its existing funding programmes, the Bank will launch a series of new Nations and Regions Investment Funds in 2023 which will deliver a £1.6bn commitment of new funding to drive sustainable economic growth. The Nations and Regions Investment Funds will increase the supply and diversity of early-stage finance for UK smaller businesses, providing finance to firms that might otherwise not receive investment and help to break down barriers in access to finance.  The new £130m Investment Fund for Wales is set to be launched next year.

Susan Nightingale, UK Network Director, Wales at British Business Bank, said:

“Our 2022 Nations & Regions Tracker highlights the ongoing vitality of Wales’ financial ecosystem, despite strengthening economic headwinds.  We want to continue to break down particular barriers to finance so that access to finance is a level playing field for all entrepreneurs – wherever they are and whatever their background.

“Wales is one of only three UK regions to buck the trend of falling usage of external finance in 2022, demonstrating that our business owners and entrepreneurs are working hard to drive the Welsh economy forward.”

[1] ‘Most deprived areas’ refers to the 15% most deprived LSOA’s across England and Wales as defined by the ONS Indices of Deprivation 2019: income and employment domains combined for England and Wales. Deprived areas are characterised by lower incomes and employment rates, and worse educational and health outcomes.
[2] Analysis undertaken from BVA BDRC SME Finance Monitor data