Sobering data from the British Business Bank pours cold water on Chancellor’s hopes for an SME-led recovery. Will the government go further?
A new report from the British Business Bank has revealed the overwhelming toll Covid-19 took on SME funding in 2020.
Here are the key findings from the Small Business Finance Markets Report and they mean for Britain’s SMEs.
SME borrowing breaks records
A record 45% of SMEs applied for external financial support during a tumultuous 2020; more than triple the number that sought funding the previous year.
Some 90% of these businesses said they were looking for external funding because of the impact of Covid-19. Three quarters said they did so to manage cashflow issues specifically.
Total gross SME lending hit an estimated £104 billion in 2020; almost double the £58 billion averaged over the last five years.
More than half of this surge in debt was driven by the Bounce Back and Coronavirus Business Interruption Loan Schemes. Together, these facilities have provided more than £57 billion in low-interest debt to more than 1.4 million companies last year.
The BBLS and CBILS are just two of the suite of initiatives the government launched to protect businesses from the pandemic.
But despite waves of government aid including debt financing, equity investment and no-strings-attached grants, just 21% of companies expect to grow over the next 12 months, while a third are expecting to shrink.
These results are deeply alarming and could pour cold water on Rishi Sunak’s hopes of SMEs spearheading an ‘investment-led’ recovery in the coming months.
Venture Capital steps up
Meanwhile, VCs and other private investors looked to shore up their portfolios and double down on well-placed investments.
Private backers channelled £8.8 billion of equity investment SMEs last year, an increase of 9% from 2019. Deals worth over £10m ticked up from 173 to 176.
The average deal size also grew by 3%. However, this was entirely driven by a handful of large deals, and was not representative of the wider cohort.
Accounting for these outliers, the average value of venture, growth, and seed-stage allocations decreased by 4%, 31%, and 7%, respectively.
While this seems like bad news for Britain’s innovators, the report does point out that, unlike the fallow period following the great recession, there appears to be sufficient investment capital to fuel growth and economic recovery.
This is supported by extensive research from Atomico, which found that more VC capital was invested in European startups last year than ever before.
The question is, will investors continue to back larger, safer bets? Or will they have enough confidence to support more vulnerable innovators? And thousands of new entrepreneurs that have entered the fray?
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What’s next for SME financing?
The Small Business Finance Markets Report makes for sobering reading.
While the study’s findings are not unexpected, they quantify the extraordinary damage this once-in-a-generation crisis has inflicted on the nation’s growing businesses.
The government has done well to cushion the pandemic’s impact through generous and accessible loan and grant schemes.
But if SMEs are genuinely going to power an investment-led recovery, as the Chancellor outlined in last week’s budget announcement, they will more and longer-term support.
True, the 2021 budget did answer calls for an extension for the furlough scheme, which is just as crucial for protecting livelihoods as it is for helping businesses retain key talent.
The budget also provided another line of low-burden debt via the recovery loan scheme to help companies ready themselves for the economy’s reopening.
But, as we said in our analysis, the Treasury could well have gone a lot further. If these troubling figures are to be believed, it may have to yet.