Report reveals decline in use of external finance by small businesses

Small businesses in the North East have reduced their use of external finance, according to a report.

The British Business Bank’s Small Business Finance Markets 2024/25 report, published on Wednesday, March 5, reveals a significant decline in the use of external finance by smaller businesses in the North East.

The report says that in the first half of 2024, only 45 per cent of smaller businesses in the region used external finance, a drop of 16 percentage points from 61 per cent in the latter half of 2023.

Shaun Fooy, senior network manager, North East England & Tees Valley, British Business Bank (Image: Supplied)

The decline was predominantly observed across core finance types, with credit card usage dropping by 13 percentage points to 15 per cent, bank loans reducing by 13 percentage points to six per cent, and overdraft usage falling by 15 percentage points to five per cent.

This drop in finance usage also corresponded with a decrease in the willingness of smaller businesses to consider using finance for growth.

In the first half of 2024, 34 per cent of smaller businesses stated they would be happy to use external finance to grow, down from 37 per cent in the latter half of 2023.

Despite this decline, there is evidence suggesting that activity is beginning to pick up in 2024.

The North East was the only region to see a 2.4 per cent growth in the volume of equity activity in the first three quarters of 2024, compared to the same period in 2023, with 42 equity deals completed across the region.

(Image: Supplied)

The value of these deals also saw a significant increase, growing by 63.4 per cent to £92.1 million over the same period.

Mr Fooy, senior network manager for North East England and Tees Valley at the British Business Bank, said: “It’s no secret that the last few years have been more challenging for smaller businesses right across the UK.

“Here in the North East, a number of economic headwinds have led to drops in confidence, ultimately leading to declines in external finance usage.

“Against this backdrop, it’s essential that smaller businesses have access to the financing they need to grow and, ultimately, drive forward regional economic growth.

“The North East is home to some truly innovative businesses, so it’s our job to ensure they have the right support to continue driving this forward.

“That’s why it’s so encouraging to see a rise in equity deals across our region, signalling that there’s still plenty of opportunity and ambition to unlock business growth.

“We’ve already seen this uptick through the deployment of the Northern Powerhouse Investment Fund II, having completed a number of exciting deals in our region.”

The report also highlights that smaller businesses generally invest less than larger businesses relative to their turnover.

In 2024, smaller businesses invested an estimated £12.3 billion, while larger businesses invested 2.25 times as much (£27.7 billion), despite larger businesses contributing slightly less turnover to the economy (48 per cent) than smaller businesses (52 per cent).

The report finds that smaller businesses who believed they have underinvested most commonly cited ‘credit being too expensive’ (58 per cent) or that they ‘could not borrow at a reasonable rate’ (55 per cent) as key factors for not investing in their business.

Louis Taylor, CEO of the British Business Bank, said: “If we are to achieve the growth we all want in the UK economy, it is important that we continue to make the case for business investment which can help drive economic growth, lift wages and improve living standards.

“The diversity of supply of finance, in terms of both product and provider, is an important factor in meeting the diverse needs of the UK’s highly varied smaller business community.

“The findings from this report further emphasise the need to ensure smaller businesses across the UK’s nations and regions have better access to the finance they need to invest.”