UK challenger banks lend more to SMEs in 2022 than incumbent banks

Ellie Duncan
01 Mar 2023

The UK’s challenger and specialist banks lent £35.5 billion to small businesses in 2022, exceeding the amount lent by incumbent banks.

The latest figures published in the British Business Bank’s Small Business Finance Markets 2022/23 report revealed that challenger and specialist banks now have a 55% share of the market.

The data showed that, while gross bank lending to smaller businesses last year reached £65.1 billion, a 12.8% increase from 2021, net lending fell by £8.5 billion, which the British Business Bank attributed to the repayment of Covid loans.

Meanwhile, an easing of supply chain shortages helped the smaller business asset finance market to reach a record level in 2022, with an increase in new business of 11% to £22.1 billion, the report found.

“Today’s report finds strong growth from challenger and specialist banks, as well as asset finance provision, as businesses seek alternative finance options,” said Louis Taylor, chief executive officer of British Business Bank.

He also pointed to “promising signs of growth in the net-zero deal sector as equity finance markets respond to growing demand for investment in green innovation”.

The report found that net-zero deal numbers outperformed the wider equity market, with these deals currently making up 12% of all smaller business equity deals compared to only 5% in 2018.

British Business Bank figures showed that the investment value of net zero-related deals rose by 184% over the past year, to hit a new record level of £1.7 billion.

In 2022, the majority of net-zero related deals were concentrated in London, which accounted for 36% of UK deals and a third of the investment value.

Outside of the capital, the southeast of England and Scotland account for a greater share of net-zero-related deal count or investment value than their share of UK turnover from low-carbon sector businesses.

However, British Business Bank saw a “significant” drop in the proportion of smaller businesses using external finance – with 33% of smaller businesses using external finance in 2022, versus 44% in 2021.

Despite this, gross lending grew as businesses sought larger loans to support their business amid rising inflation.

“Smaller businesses are clearly adapting to a challenging economic climate, with many reducing their use of external finance,” Taylor added.