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

Small businesses in south-east England are benefiting from a strong rebound in bank lending, leaving the rest of the UK behind, according to new research by the British Business Bank.

Lending to businesses in the region has surged, leading to a 21% increase 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 in the report reveals that although lending in the South East increased by 10% in 2023, other areas of the UK are still struggling. Last year, the number of loans approved fell by 9% across the country, with sharp declines in regions such as the North East and Wales. Furthermore, the total value of approved loans declined 18% nationwide, although the Southeast bucked the trend, recording a 21% increase in loan values.

Incomplete recovery across regions

The uneven recovery in lending highlights the growing gap between the south-east and other parts of the UK. The British Business Bank noted that while lenders were more cautious about loan approvals, businesses in the South East were able to secure much-needed funding, helping to boost economic activity in the region.

Lewis Taylor, chief executive of the British Business Bank, said: “As much as there has been an increase in the provision of bank finance for small businesses, the growth in credit cards is the largest, overdrafts too, as well as leasing (asset finance).” , which has seen almost a post-Covid boom.

Despite the strong performance in the South East, Taylor acknowledged the wider challenges facing small businesses across the UK. High interest rates and cautious lending have curbed borrowing elsewhere, with the North East seeing a 24% drop in loan volumes in the first half of 2024, exacerbating a 37% decline the previous year. The Northeast, home to major industries such as manufacturing and agriculture, has been particularly hard hit by a slow lending recovery.

Relying on credit cards and careful trust

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 financing to meet short-term needs or fill gaps in their access to loans. Taylor noted that the reasons behind this trend are unclear but can be linked to restricted access to other forms of financing.

Although demand for bank loans has declined, businesses across the UK are increasingly exploring alternative sources of finance. Last year, 59% of SME debt financing came from new lenders such as Starling Bank, Funding Circle and ThinCats, marking a shift away from traditional banks such as Barclays, NatWest and Lloyds, which dominated SME lending a decade ago. Time.

However, companies are finding that the external financing landscape is more complex. “Companies will have multiple relationships for different things,” Taylor explained. “They will have some banking relationships for transactions, others for things like foreign exchange. It’s a more complex picture for SMEs, and we’re doing our best to guide them.”

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

Government support and long-term financing

The British Business Bank, founded in 2014 to diversify access to finance for small businesses, has played a crucial role in helping businesses navigate the evolving financial landscape. As it celebrates its 10th anniversary, the bank has secured permanent equity and debt financing of £7.9bn, following the announcement by Chancellor Rachel Reeves.

This long-term commitment includes anchor funds such as the £660m Northern Powerhouse Fund, which 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.

Lewis 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 gives the bank greater flexibility in how it allocates funds and positions it to be a more credible investor in early-stage companies, he said.

“We now have £7.9bn of commercially focused capital which has a consistent risk appetite throughout the economic cycle. “We will continue to write checks into (project) funds to support them and encourage others to do so, without compromising our underwriting standards,” Taylor added.

As the South East continues to lead the recovery in lending to small businesses, other regions of the UK will be hoping for further support to bridge the funding gap. With new long-term funding from the British Business Bank and its commitment to diversify funding, there are hopes that regional lending differentials will begin to narrow, supporting economic growth across the country.