The British Business Bank’s fourth Nations and Regions Tracker, published today, finds usage of external finance has increased overall across the UK, with 11 out of the 12 nations and regions recording an uptick in use of small business finance.

The report also found that the majority of businesses (61%) viewed current trading conditions as presenting more threats than opportunities, despite Q1 2024 seeing a 7% increase in equity funding relative to Q1 2023.

External finance usage among smaller businesses saw notable growth in 2023, with 46% of businesses now leveraging it, up 10 percentage points from the previous year. Wales led the way, with 53% of smaller businesses using external finance, marking a significant 16 percentage-point increase.

The Midlands, North East, South East, and Northern Ireland also experienced strong performances with double digit growth in external finance usage. However, growth rates were more modest in Scotland, Yorkshire and The Humber, and the South West. The East of England was the only region where usage remained in line with the previous year.

The report also shows an increasing reliance on credit card usage. Across all the various finance types available, nearly one in five (17%) businesses made use of credit cards followed by bank overdrafts (13%) and leasing and vehicle finance (12%), highlighting the challenges for businesses seeking external finance.

Cautious optimism among smaller businesses but challenges remain

Smaller businesses showed renewed interest in external finance in 2023, with a growing number using it to seek investments that had previously been delayed. Between 2021 and 2023, fewer than half (44%) across the Nations and regions had identified and made any investments in their business.

And although inflationary pressures have slowly begun to ease, the majority (61%) still viewed current trading conditions as presenting more threats than opportunities and over three quarters (76%) were still feeling the impact of recent increases in costs in 2023.

Demand for loans and overdrafts remained subdued

The tracker found that while the distribution of core debt finance forms such as term loans and overdrafts across UK Nations and regions is less imbalanced than other finance types, location-specific challenges remain.

Northern Ireland, Scotland, and the North East lead the way with the highest concentration of bank loans and overdrafts relative to the size of their small business populations, although this is largely driven by the strong presence of finance-reliant sectors such as agriculture and manufacturing in these regions.

However, early signs from 2024 suggest a more promising outlook for the small business core debt market. The first half of 2024 saw a 21% increase in the volume of approved loans and overdrafts compared to the first half of 2023, with the South East experiencing the largest uptick.

Announced equity deals declined, but stabilisation seen in 2024

The UK equity market experienced a decline in the number of announced deals across all Nations and regions in 2023, reflecting ongoing economic challenges. However, early signs from the first half of 2024 indicate stabilisation, with a positive outlook for the year ahead. In Q1 2024, equity funding for smaller businesses increased by 7% compared to the same period in 2023, suggesting renewed investor confidence.

London continued to dominate the UK’s equity landscape, accounting for nearly half (49%) of the country’s total deal count and 63% of its investment value. However, the UK market continued to face significant challenges in 2023. The number of equity deals outside London fell by 22% year-on-year to 1,098, while total investment dropped by 48% to £3.27 billion.

British Business Bank driving impact across the UK

The British Business Bank has continued to deliver significant support to smaller businesses across the UK through its debt and equity finance programmes, with a focus on benefitting firms outside of London.

The Bank’s Nations and Regions Investment Funds and their predecessor regional programmes provided £236 million in equity funding to over 200 companies located outside the capital in 2023, with a particular emphasis on supporting spinouts in regional markets, highlighting its commitment to fostering innovation and growth in the Nations and regions. These funds also invested £152 million  in debt finance supporting over 120 companies from across the UK.

In addition, the Regional Angels Programme facilitated £441 million in investments over the same period, further boosting regional equity markets and providing critical support to high-potential businesses outside London.

Louis Taylor, CEO of 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. This year’s Nations and Regions Tracker captures a mood of cautious optimism throughout the UK, and one which will hopefully see an uplift this year and beyond.

“The British Business Bank has – and will continue to – play a pivotal role in providing businesses in the Nations and regions with access to the finance they need. We stand committed to continue our work to unlock potential and help boost long-term growth throughout the United Kingdom.”