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South East leads in bank loans to small businesses as other UK regions lag behind

October 21, 2024

Small businesses in southeast England are benefitting from a strong recovery in bank lending, leaving the rest of the UK trailing behind, according to new research from the British Business Bank.

Lending to businesses in the region surged, driving a 21% rise in approved loans and overdrafts across the UK in the first half of the year, marking the first positive movement in small business finance since the pandemic.

Data from the report reveals that while lending in the South East increased by 10% in 2023, other regions of the UK are still struggling. Last year, the number of approved loans fell by 9% across the country, with sharp declines in areas such as the North East and Wales. Moreover, the total value of loans approved dropped 18% nationwide, though the South East bucked this trend, recording a 21% increase in loan values.

Patchy recovery across regions

The uneven recovery in lending highlights the growing divide between the southeast and other parts of the UK. The British Business Bank noted that while lenders have shown greater caution towards loan approvals, businesses in the South East have managed to secure much-needed finance, helping boost economic activity in the region.

Louis Taylor, chief executive of the British Business Bank, said: “To the extent that there is an increase in the provision of bank finance to small businesses, credit card growth is the largest, overdrafts as well, and also leasing [asset finance], which has seen an almost post-Covid boom.”

Despite the strong performance in the South East, Taylor acknowledged the broader challenges facing small businesses across the UK. High interest rates and cautious lending have curbed borrowing in other regions, with the North East experiencing a 24% drop in the volume of loans in the first half of 2024, compounding a 37% fall the previous year. The North East, home to key industries like manufacturing and agriculture, has been hit particularly hard by the slow recovery in lending.

Credit card reliance and cautious confidence

The British Business Bank report also revealed a significant rise in the use of credit cards by small business owners, with many turning to this form of finance to meet short-term needs or to bridge gaps in their access to loans. Taylor noted that the reasons behind this trend were unclear but could be linked to restricted access to other forms of finance.

Although the demand for bank loans has been subdued, businesses across the UK are increasingly exploring alternative sources of finance. Last year, 59% of debt funding for small and medium-sized enterprises (SMEs) came from new lenders such as Starling Bank, Funding Circle, and Thin Cats, marking a shift away from traditional banks like Barclays, NatWest, and Lloyds, which dominated SME lending a decade ago.

However, businesses are finding the landscape for external finance more complex. “Companies will have multiple relationships for different things,” Taylor explained. “They will have some transactional banking relationships, others for things like foreign exchange. It is a more complex picture for SMEs, and we are doing what we can to guide them.”

Despite this, the majority of small businesses (72%) continue to operate without external finance, a slight decrease from 77% in 2022. Confidence in using external finance remains low, with only 33% of businesses expressing confidence in borrowing to fund growth.

Government support and long-term funding

The British Business Bank, established in 2014 to diversify access to finance for small businesses, has played a critical role in helping businesses navigate the evolving financial landscape. As it marks its tenth anniversary, the bank has secured permanent funding for its £7.9 billion in equity and debt capital, following an announcement by Chancellor Rachel Reeves.

This long-term commitment includes key funds such as the £660 million Northern Powerhouse Fund, which co-invests alongside private-sector partners to support businesses across the UK. In the year to March 2024, the fund invested £246 million in more than 200 companies.

Louis Taylor hailed the decision as a “significant moment,” explaining that the new structure allows the bank to reinvest capital rather than returning it to the Treasury. This change, he said, gives the bank greater flexibility in how it allocates funds and positions it to be a more credible investor in earlier-stage companies.

“We now have £7.9 billion of commercially focused capital that has a consistent risk appetite through the economic cycle. We will continue to write cheques into [venture] funds to cornerstone them and encourage others in, without compromising our underwriting standards,” Taylor added.

As the South East continues to lead the recovery in small business lending, other regions of the UK are hoping for more support to bridge the financing gap. With the British Business Bank’s new long-term funding and commitment to diversifying finance, there are hopes that regional disparities in lending could start to narrow, supporting economic growth across the country.