Use of external finance among small businesses in Wales was the highest and fastest growing among all UK nations and regions in 2023.

The British Business Bank’s fourth annual Nations and Regions Tracker shows that in 2023, 53% of smaller businesses in Wales were using external finance, up from 37% in 2022. This makes Wales the top nation or region in the UK both in terms of external finance usage rates, and additionally for experiencing the largest increase from the previous year, equating to 16 percentage points.

The Welsh picture is set against a wider UK backdrop where use of external finance has generally rebounded, increasing in 11 out of the 12 nations and regions, all of whom recorded an uptick in use of small business finance, with Wales leading the way.

While the use of external finance in Wales is cause for optimism, the report suggested a more nuanced picture, British Business Bank says. Caution and concern about recent cost increases was the overarching sentiment among smaller businesses in Wales in 2023. There was however also confidence about their longer-term capacity to secure external finance.

Many smaller businesses in Wales felt economic uncertainty in recent years has had an impact on their investment plans. While almost half of smaller businesses said in 2023 they had invested in the last three years, 30% of those businesses felt they had underinvested and among the latter, more than 1 in 5 (22%) mentioned economic uncertainty as a key barrier to investing more.

The report also details that Welsh businesses were among the most concerned in the UK in terms of their perceptions of the economy in 2023, as two thirds (66%) of these businesses felt the trading environment offered more threats than opportunities, above the UK average of 61%. In addition, 79% of smaller businesses in Wales still felt the impacts of rising costs in recent months vs. 76% in the UK as a whole.

Wales saw a considerable fall in loans and overdrafts in 2023, although this was more favourable relative to their share of the smaller business population, and nationally demand for loans and overdrafts remained subdued.

The volume of loans and overdrafts approved or increased in Wales per 10,000 smaller businesses between 2021-2023 was above the UK average (357 vs 221), although the corresponding value of those applications was narrowly below it (£28 million vs £32 million).

Even though Wales experienced the second highest decline (-23%) among all UK nations and regions in the volume of loans and overdrafts from the UK’s top seven SME lenders between 2022 and 2023, the fall in the associated value of those applications was only half that of the UK downtrend (-9% vs -18%).

Wales’ equity activity levels were particularly resilient in a year which was marked by strong declines throughout the UK. Wales experienced the lowest reduction (-8%) in equity deals among all UK nations and regions between 2022 and 2023, in addition to being the sole nation/region to experience a rise in investment value, at 23% (driven by a handful of high value deals). This bucked the UK-wide downtrend in investment value (-48%).

Growth stage businesses in Wales experienced a doubling of equity deals between 2022 and 2023, while the fall in venture stage deals was considerably lower than the UK average (-4% vs -23%).

Data for Wales in H1 2024 indicated that there was a 19% decline in the number of deals from H1 2023, alongside a 50% fall in investment value. However, this represented a strong upturn in both deal numbers (46%) and value (68%) relative to the second half of last year. At the UK-level, deal numbers were also up by 6% and investment value by 27% in H1 2024 compared to H2 2023, suggesting stabilisation and renewed investor confidence, with a positive outlook for the year ahead.

The British Business Bank continues to invest in a range of programmes that help address finance gaps for Welsh businesses. This includes the recently launched Investment Fund for Wales, a £130 million funding commitment for small and medium businesses in Wales.

Smaller businesses in Wales also benefitted from 256 Start-Up Loans worth £3.1 million in financial year 2023-24, as well as from a variety of other bank programmes available throughout the UK.

Susan Nightingale, Director, UK Network, Devolved Nations, at the British Business Bank, said:

“While we continue to face a challenging economic environment, it is encouraging to see a renewed appetite for external finance among the business community, with Wales leading the way by demonstrating a healthy appetite for a range of external finance options that points to positive signs for economic health and growth.

“It is also heartening to see the equity picture in Wales significantly outperforming the rest of the UK in terms of positive equity activity in an otherwise difficult year for the wider equity market. It is our intention to continue to provide support for Wales’ resilient equity landscape via the £130 million Investment Fund for Wales, from which £50 million has been specifically allocated to deliver equity funding for ambitious Welsh growth businesses.

“The British Business Bank will continue to play a pivotal role in providing smaller businesses in Wales with access to the finance they need.”