In a challenging economic climate demand for external finance has dropped among smaller businesses according to the British Business Bank’s Small Business Finance Markets 2022/23 report published today.

Across the UK, in Q3 2022, only 33% of smaller businesses were using external finance compared to 44% the year prior. Overall demand for external finance has dropped from 48% among Welsh smaller businesses during Q3 2021 to 28% in Q3 2022.

For the smaller business equity finance market in Wales, whilst the number of announced equity deals in the first three quarters of 2022 compared to the same period the previous year was up by 4% to 51, the value of investment was down by 4% to £68m, indicating a fall in deal sizes.

Wales is one of only four UK Nations and regions to show year-on-year growth in the number of announced equity deals in Q1-Q3 2022, in contrast to falls elsewhere in the UK. Across the UK, equity investment has since slowed considerably since Q3 2022.

The report also noted that challenger bank lending exceeded that of the major banks in 2022. £35.5bn of bank lending came from challenger and specialist banks in 2022, demonstrating signs of strong growth in the challenger market, a positive sign for Cardiff’s growing reputation as a hub for challenger banks. Leading names in the sector including Starling and Tandem are based in the Welsh capital.

Business population growth in Wales

The report outlines how Wales is one of only three Nations and regions in the UK to see an increase in business population between 2021 and 2022. At 5.4% growth Wales saw the highest rate of business population growth across the UK, alongside Northern Ireland (3.6%) and the South West (2.9%), with most areas experiencing negative growth.

Net zero deal numbers outperforming the wider equity market

Data shows that equity finance markets are adapting to growing demand for investment in green innovation with growth in the number of net zero deals outperforming the wider equity market. These deals currently make up 12% of all smaller business equity deals compared to only 5% in 2018, and investment value is rising even faster.

London is the region with most net zero deals, accounting for 36% of UK net zero related deals and a third of the investment value. Meanwhile Wales is responsible for 4% of net zero related deals and 1% of investment value (£39m).

Among the businesses securing net zero equity deals in recent years is QLM, a Cardiff based tech firm which developed a new technology to fix methane leaks in oil and gas extraction. The funding came from the Green Angel Syndicate (GAS), which benefits from British Business Investments funds committed through its Regional Angels Programme.

Jess Phillips, Senior Manager for Wales at the Business Bank, said:

“The new report paints a picture of economic resilience in Wales, despite increasingly turbulent economic waters across the whole of the UK.

“Overall demand for external finance has fallen, however the equity investment in Wales shows a mixed picture with marginally increasing deal numbers, but with decreasing investment value.

“Ensuring that businesses can access the skills, support and finance is crucial to supporting economic resilience and future growth. The launch of our £130 million Investment Fund for Wales this year will increase the supply and diversity of early-stage finance for Welsh smaller businesses, providing funds to firms that might otherwise not receive investment and help to break down barriers in access to finance.”