Challengers dominate bank lending in 2022

Louis Taylor

A total of £35.5bn of bank lending came from challenger and specialist banks in 2022 – exceeding lending by the major institutions, giving their specialist counterparts a 55 per cent share of the market.

Gross bank lending increased by 12.8 per cent but net lending fell by £8.5bn in large part reflecting repayment of Covid loans.

The British Business Bank’s Small Business Finance Markets report revealed the smaller business asset finance market also reached a record level in 2022 with an increase in new business of 11 per cent in 2022 to £22.1bn. This was driven in part by some easing of supply chain shortages and by rising asset prices.

The data reports a considerable drop in the demand for external finance. In Q3 2022, only 33 per cent of smaller businesses were using external finance compared to 44 per cent the year before.

Gross lending grew despite fewer smaller businesses using finance, as they sought larger loans to support their business due to inflationary pressures. In addition, survey findings show that success rates for those seeking loans fell sharply from 80 per cent to 64 per cent year on year.

For the smaller business equity finance market specifically, investment activity has slowed considerably since Q3 2022. Recent years have seen larger equity deal sizes and increased company valuations but in recent months investors have re-evaluated their positions leading to smaller deals and lower valuations.

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 net zero deals outperforming the wider equity market. These deals currently make up 12 per cent of all smaller business equity deals compared to only 5 per cent in 2018, and deal values are rising even faster.

Investment value of net zero-related deals rose by 184 per cent over the past year, soaring to a new record level of £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

The majority of net-zero related deals are currently concentrated in London, accounting for 36% of UK deals and a third of the investment value. Outside of the capital, the South East of England and Scotland account for a greater share of net-zero-related deal count or investment value than their share of UK turnover from low-carbon sector businesses. All other Nations and regions have a lower share by comparison.

The report reinforces the importance of innovation in order to scale up UK productivity rates and encourage economic growth in a challenging macro-economic climate. The UK is ranked second in the G7 for our innovation environment by the Global Innovation Index, but the UK’s ranks fifth in the G7 nations in terms of the proportion of its smaller businesses that are innovative. The UK would require around 440,000 more innovative smaller businesses to meet the G7 average.

British Business Bank CEO Louis Taylor said: “The report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options.

“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.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance. At the British Business Bank, we are committed to supporting these businesses as they seek to achieve sustainable growth, and in turn boost economic productivity, by improving their access to external finance.”

Finance markets report