The key chart
Trends in net lending flows to UK SMEs (£bn) (Source: BoE; CMMP)
The key message
How can UK SMEs invest fully in growth and job creation when monthly financing flows have been negative since March 2021?
Most SMEs in the UK rely on bank loans and overdrafts as their main source of external financing. They use loans typically to finance investment and overdrafts for various cash-flow related purposes.
The previous post highlighted the structural challenges faced by SMEs in accessing external finance. This post considers the cyclical challenges they face with a focus on trends in financing flows to the SME sector.
Gross lending flows remain resilient in absolute terms – £63bn in the twelve months to August 2023 – but they are 40% below their peak level in the twelve months to February 2021 (£106bn) and 3% below the level recorded in the twelve months to December 2022 (£65bn).
The spike in gross lending during 2020 reflected the impact of various COVID-19 related schemes while the increase during 2022 reflected the positive impact of challenger banks and other specialist lenders who lent more to the sector than the UKs big five banks in 2021 and 2022.
Repayments of SME loans remain close to record levels, however, driven largely by the ending of various payment holidays. The result, as shown in the key chart above, is that net monthly lending flows to SMEs have been negative since March 2021 – a pessimistic message from the money sector in terms of SMEs’ future investment plans.
Demand for working capital products such as bank overdrafts, which had increased during 2022, has also slowed during 2023. According to the latest Bank of England data, monthly overdraft flows turned negative in the 12 months to June 2023 (-£0.2bn) and August 2023 (-£0.5bn).
In short, current cyclical trends compound the longer-term structural factors that inhibit SMEs ability to invest fully in growth and job creation in the UK. Net lending and overdraft flows are both negative. This is despite the positive impact of challenger banks and specialist lenders over the past two years.
The next post in this series will examine the extent to which these negative trends are exacerbated further but the transmission of the Bank of England’s monetary policy.
How can UK SMEs invest fully in growth and job creation (II)?
This is the second of three short posts examining the challenges faced by UK SMEs in investing fully in growth and job creation. It focuses on the cyclical challenge associated with negative bank financing flows. The previous post focused on the longer-term structural challenges at the micro and macro level. The subsequent post will examine the speed of monetary policy transmission to the cost of SME borrowing.
(Source: BoE; British Business Bank; CMMP)
Gross bank lending flows to SMEs slowed to £63bn in the twelve months to August 2023, down 3.4% from £65bn in 2022 and down 40% from their peak level of £106bn in the 12 months to February 2021 (see table above).
Note that the spike in lending in 2020 (see chart below) was largely driven by government guaranteed COVID-19 loans. These included the Coronavirus Business Interruption Loan Scheme (CBILS), Bounce Back Loan Scheme (BBLS) and Recovery Loan Scheme (RLS). Excluding these three schemes, gross lending was £48.1bn in 2020 and £49.7bn in 2021 (British Business Bank, 2023). Note also that there was also evidence of SMEs substituting loans for overdrafts as a source of working capital financing during the pandemic period.
Trends in gross lending flows to UK SMEs (£bn) (Source: BoE; CMMP)
The increase in gross lending in 2022 has been attributed to increased supply from challenger banks and specialist lending. Gross lending from these sources was £29.2bn in 2021 and £35.5bn in 2022, the highest annual level since records began in 2012 (British Business Bank, 2023). Challenger and specialist banks’ share of gross lending exceeded that of the big five UK banks in both 2021 and 2022. (SMEs recorded less success in obtaining all the financing they need from their finance providers and a greater willingness to use more than one provider.)
Trends in repayments by UK SMEs (£bn) (Source: BoE; CMMP)
Gross repayments of SME loans peaked in January 2023 at £74bn and have slowed to £72bn in the twelve months to August 2023 (see chart above). In calendar-year terms, the £73.8bn repayments in 2022 were the highest since records began in 2012. They were driven largely by the end of the one-year holiday on paying back the principal and interest on BBLS loans and on paying back interest on CBILS loans for those SMEs that had taken the last opportunity to draw them down.
Trends in net lending flows to UK SMEs (£bn) (Source: BoE; CMMP)
Net monthly flows reflect the balance between the gross lending flows and repayments described above. As can be seen in the chart above, net monthly bank lending flows to SMEs have been negative since March 2021 – a pessimistic message from the money sector in terms of SMEs future investment plans.
Trends in overdraft flows to UK SMEs (£bn) (Source: BoE; CMMP)
Demand for working capital products such as bank overdrafts, which had increased during 2022, has also slowed during 2023. According to the latest Bank of England data, they turned negative in the 12 months to June 2023 (-£0.2bn) and August 2023 (-£0.5bn).
Conclusion
In short, current cyclical trends compound the longer-term structural factors that inhibit SMEs ability to invest fully in growth and job creation in the UK. This is despite the positive impact of challenger banks and specialist lenders over the past two years.
The next post in this series will examine the extent to which these negative trends are exacerbated further but the transmission of the Bank of England’s monetary policy.
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.